By Anand James
While the declines in benchmark indices hogged headlines, the continued rise in VIX appeared to warn traders of major falls. Our view is that the rate of change of VIX that swung it from record low to multi year highs has been steep, encouraging us to take the view that we will be seeing a reversal in VIX.
This should ideally curb wild moves in Nifty for the rest of the May series, especially as the electoral outcome would be known only after May expiry. That we have three contracts, by way of May and June monthly contracts as well as June’s 1st weekly contract to play the electoral outcome should also help towards easing out volatility.
For now, the June monthly contract has become active with good delta in the OTMs, but it seems that the weekly contract will take another week or two to become active. This construct allows for markets to regain calmness in the coming week.
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Reversal spotted in indices, but sustainability doubted.
The break of 22000 in Nifty did bring in jitters, and the recovery swing on Friday failed to push much above our upside marker of 22095. Seen in isolation this suggests that the 21500 trajectory that we had set out with on Friday continues to be in play.
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However, the formation of an inside bar, especially at the Bollinger band extremity, gives us a whiff of hope that a relief rally aiming 22223-22400 is likely to unfold in the early part of next week.
Similar set up in oscillators as well as directional moving indicators were seen in late April, when a vertical recovery from 21777 unfolded. Rise in VIX to 18.4 is certainly a point of concern though and assures more volatility.
With Bank Nifty, we prefer to take a much cautious stanceas oscillators are yet oversold enough to lend support via short covering rallies. Friday finished with a long tailed down close indicating rejection trades which are likely to be dominant in the early part of the week as well on upside attempts.
We are now off the 78.6% fibo support of the swing off April lows, providing a window for recovery aiming 48051. Inability to clear this will expose 47140 and 46550.
PSU and Metals eye recovery
Both the sectors saw cuts during the week, but Friday saw greenshoots aided by significant gains in Hindustan Zinc and SBI in the metal and PSU sector respectively. As 83% of PSU Bank index stocks are nearing the oversold region, the pull back in SBI, which forms around 44% of Nifty PSU Bank index signals potential recovery.
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We expect the Index to bounce from current levels towards 7400-7600 levels with crucial downside levels marked around 6990. Stocks that could lead the reversal are SBIN, Bankbaroda, PNB, IOB, Unionbank, Canbk, Bankindia and Ucobank.
Meanwhile, apart from Hindzinc and Vedl, all of the metal stocks registered losses this week losing an average 4%. Major contributors to the dip were Adanient, Jswsteel, Tatasteel and Hindalco which together form around 55% of Nifty Metal index and around 60% of stocks in the index are yet to move into the oversold region.
But despite the run of losses, metal stocks have had intermittent days of gains, suggesting persistent risk appetite which should translate into stronger buying, given the tail winds of Hindustan zinc.
(Anand James, Chief Market Strategist at Geojit Financial Services. Views expressed are author’s own. Please consult your financial advisor before investing.)
