From 12400 we have touched 7600 in only 1 month that is a correction of 38% on Nifty. If we look at history, it is also one of the bloodiest. For 4 months economists kept repeating that economy is in bad shape and we do not understand what we are doing at high levels. Corona Virus proved to be the trigger.
Now the question is: Is it over?
I don't think so. We are in an un-chartered territory. This is something never seen before. US and Europe in lock down and new cases emerging every now and then, It really is tough to predict. All we can do is look at the history.
2008 Financial crisis bottomed out near 0.618% of Fibonacci retracement levels. Right now that is placed at 5560 levels which was also approximate high of last bull run. If this is indeed a recession then one must brace for further fall to 5560-6300 levels. Given the pace we are picking everyday, it’s a 3 days journey as new normal for Nifty is a 700-1000 point move. But we can reach there slowly. What it presents investors with is an opportunity to buy quality stocks. I am buying portfolio stocks with every dip in small quantity. To be honest, I want this recession to be over with and not have an immediate bounce. We have already suffered a pain of 38%. A little more and most of the stocks will start bottoming out with market and then as markets revive, we can have another bull run for next few years without the fear of next recession. We may face correction but not bloodbath like this. So I am buying on every bloody day.
As trader, From 24 Feb 2020, we are witnessing continuous short buildup. We did not have a single day where OI was built to a bullish side.
Historically, RSI is at its lowest and extremely oversold which calls for a technical bounce. Even stochastics is oversold and trying to come out of that.
Not a single indicator based system is giving a bullish sign. Either it is oversold or bearish. But no sign of bullish.
Trend changes from lower time frame to higher time frame. On hourly charts also, we need to trade successfully above 9412 or 23500 for basic formation of Higher High, Lower Low pattern to form a basic up trend pattern.
Coming to data, I think we had a little short covering or long buildup today on Futures. Since it was a massive gapdown which later filled, it is difficult to say. But price kept strong, so might be previous days short exited or long positions were added. A day or two is needed to understand the price action further.
India Vix is at historically high levels of 72. It does not have any interpretation right now. We are in unchartered territory. Generally it means more bearishness ahead, but right now it is extreme volatile movements. +-700 or +-2000 is new normal for Nifty / Bank Nifty. Till we see major Vix crash, we cannot expect stability.
We are at 8263 and maximum OI at calls and puts is buildup at 9000. Although there was unwinding of puts, still OI at puts is 16 lakh compared to 12 lakh of calls. At 8500 puts, scenario is same. 16 lakhs put against 10 lakh calls. Although running of put writers is there due to unusual gap down on Thursday. A lot of calls were added to 8500, 9000 strikes. On 8000 strike also there was huge call writing and put unwinding. Puts were written at 7500 and 7000 levels. We are Level 3 - Bearish right now as far as data is concerned. Call Writing and Put Unwinding. If we have to go bullish, then next two days data need to change with Call Unwinding and Put Writing. Right now we may as well be preparing for wild swings.
On Bank Nifty, 1900 18000 and 17600 witnessed heavy put writing in its own standards. Call and Put writing was there on Bank Nifty, which I suggest is straddle being written by option writers due to heavy premiums. Calls were written on 23000 and 24000 suggesting market is expecting a temporary bounce to that levels. Again we may take a day or two for that confirmation.
Looking at SGX Nifty, we might open a little positive today. Crude Oil has jumped 20% to $28. INR has weakened further to 75 levels. We cannot deduce that a base has formed as of now.
My trade plan is to wait and watch. On hourly charts, I am waiting for Nifty and Bank Nifty to trade above Williams Alligator and matchup the end of day data with Option Chain to decide what is happening. I might end up not taking a trade also. In any case, I will not take naked position over night and will keep the quantity low. One must remember that at base formation, movement is wild and whipsaws are more. Last 1 month has been a one way ride, so things will still be rocky going ahead.
Rohit Katwal