My last post on markets in late January had discussed the potential for Bank Nifty falling to 29,000. If it had reached there, it would not have been surprising as Bank Nifty has been trading weak for some time and has been going through the motions even when Nifty was showing resilience.
The Budget event finally gave it the motive to jump off a cliff. But the fall thereof turned on its head after testing a low of 29,612 on Monday. And so did Nifty, wiping off almost all it lost since Saturday's collapse.
There is one interesting fact. Prior to the collapse of both the indices had penetrated the 60-SMA which has been acting like a guarding angel at least twice in the month of January, when they were poised to drop. So, ideally the break of such an important moving average should have led to a deeper and sustained fall.
Not only did it bounce off the 200-day SMA, but the mean reversion has happened way too quickly that warrants closer inspection, because we are either looking at a relapse of bear trend, or a powerful surge to newer heights.
We will get to test this hypothesis on Thursday, with the February 6 weekly contracts going to expire. Nifty has tested the key moving average, but Bank Nifty has more room, so a clear divergence in trading behaviour on Thursday will not be a surprise.
Both indices had closed outside 2 standard deviation ranges before swinging back sharply on the next day itself, which is quite a bullish sign. But they are both back to the middle of the Bollinger band.
Meanwhile, Nifty's Option traders are seen pumping money into OTM call longs as far as 12,500, while Puts get written. So, unless there is an upside gapped opening on Thursday, my money is on dips rather than rallies. Nifty might see some turbulence near 12,118, but Bank Nifty could breeze another 500 points, possibly towards 31,500.
Meanwhile, oscillators have mostly retracted to neutral zones, with MACD in Bank Nifty is about cross signal line from below. The preference would have been for Bank Nifty if not for the pace at which its implied volatilities (IVs) have gone up, while Nifty's IVs are still near 10-11 suggesting that there is a good room for further upside, after the initial consolidation.
(The author is Chief Market Strategist at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.