Matryoshka analysis

Let’s examine layer upon layer of statistical data to get to the markets’ main message.

The first chart I share is the NSE advance-decline ratio. After price itself, this indicator is the fastest (leading) indicator of which direction the winds are blowing. This simple but accurate indicator calculates the ratio between rising and falling stocks. As long as winning stocks outnumber losers, the bulls dominate. This metric assesses a marshmallow trader’s risk appetite. They are pure intraday traders.

The Nifty registered gains after being in the negative zone for four consecutive weeks. The advance-decline ratio went to the moon mainly due to the strong distortion in Friday’s token buying session (Mahurat session). These high levels are unlikely to continue for long, as overhead supply is likely to increase, as I wrote earlier. Marshmallow traders are remarkably muted in their buying conviction.

A video tutorial on Marshmallow theory in trading is here

The second chart I share is about market-wide position limits. This measures the amount of exposure used by traders in the derivatives (F&O) space as a component of the total exposure permitted by the regulator. This measure assesses the risk appetite of two marshmallow traders. These are deep-pocketed, high-conviction traders who carry over their trades to the next session.

After hitting a multi-quarter high of 45% before expiration, the figure fell to 28.04%, which is a multi-month low. This tells us that conviction levels were low in the camp of the two marshmallow traders. This figure must increase with rising prices, otherwise a new long-term outcome cannot be ruled out.

A dedicated video tutorial on how to interpret MWPL data in several ways is available here

The third chart I share is my internal “momentum” indicator. It measures the strength of any price movement.

Last week, I raised a red flag because the Nifty fell with higher momentum readings. This week we see that the Nifty rally has been on lower momentum readings. This means that the rise was at least partly due to short covering rather than further forced buying. The lower MWPL confirms this hypothesis.

While the Bank Nifty saw bigger gains, the momentum readings were slightly higher, which tells me the buying was thin. Ideally, prices and impulses should rise together to confirm a sustainable rise.

The last chart I share is my internal “LWTD” indicator. It calculates the lift, weight, thrust and drag encountered safely. These are four forces that any powered aircraft faces during flight, so applying it to traded securities helps a trader estimate prevailing sentiments.

While the Nifty rose to record weekly gains after four straight weeks of losses, the LWTD remains in the negative zone at -0.41 (previous week -0.62). This tells me that the new buying support will remain thin, although compared to the previous week it could be slightly improved. This reading is far from inspiring confidence. Prices and LWTD must increase in unison to indicate a sustainable rise.

A video tutorial on interpreting the LWTD indicator is here

Nifty Verdict

The candle shown on the weekly chart is tiny because the range in the Nifty was narrow. It is contained in the previous week’s candle and is known as the “inner formation” in Japanese candlestick terminology. It marks a pause or indecision. This is a weekly chart, the chart I shared last week was daily (read it here). It showed a head and shoulders formation still in place. The potential price target of 23,250 remains open.

The price is the 25-week average, which is the six-month average of a retail buyer’s average holding cost. The outlook is therefore nervous at the moment. As I mentioned last week, only a sustained trade above the 25,200 mark will firmly revive sentiments. Sustained trade below the 24,000 mark weakens the bulls.

Your call to action – Watch the 24,000 level as short-term support. If the Nifty remains above this level on a sustained closing basis, markets could witness short covering. A further rally is only likely above the 25,200 mark.

Last week, I estimated ranges between 52,325 and 49,250 and 24,825 and 23,550 on Bank Nifty and Nifty, respectively. Bank Nifty crossed the specified resistance level by 30 points, while the Nifty remained within the specified parameters.

This week, my estimate is between 53,225 – 50,125 and 24,925 – 23,700 on Bank Nifty and Nifty, respectively.

Trade with strict stop losses. Avoid trading counters with spreads greater than 8 ticks.

Have a profitable week.