Week Ahead (India) – 22-Sep-2019

Updated: Dec 6, 2019

Key points for the week

· Uptrend is intact as stated in past two weeks

· NIFTY moves up after testing lower boundaries of the parallel channel

· Rally following announcement from the Finance Minister confirmed resumption

The market started on a negative note, following the drone attack on Aramco facility last weekend. Fearing oil shock, the market started on a negative note, and that slide continued with RBI Governor making multiple statements on threat to current account and other macroeconomic issues. While the GDP growth rate had slipped to 5% with negative growth in many sectors including auto, the RBI Governor stated that there was little space for any fiscal booster indicating that the Government had little to offer at this time.

However on Friday, the Finance Minister surprised market with corporate tax rate cut, bringing rate to 22% from 30%, which would cost the government Rs 1.45 Lakh Crore (INR 1.45 Trillion), or approximately $20.4 Bn annually. While it would take some time to see the impact of this rate cut on economy, the market took this news with great enthusiasm, sending NIFTY up by 5.3% at close.

Technically the NIFTY price action has confirmed that it is bouncing from the lower boundaries of the parallel channel that it is in, with this upward move. On weekly chart we can see that it has broken above an area of consolidation that it was negotiating for past few weeks. Continuing the momentum, we expect the market to test prior highs as stated in last week’s bulletin.

NIFTY Weekly 22nd Sept 2019

The midcap index NIFTYMIDCAP50 is consistent with our last week’s analysis, and is also showing same trend, except that it is in declining parallel channel. If midcap behavior is to suggest anything, we expect it to rise up to the top of the channel near 4800 that coincides with prior supply area. This move may take another month or two.

NIFTYMIDCAP50 Weekly 22nd Sept 2019

On daily chart NIFTY shows that it has convincingly cleared the 11150/11200 level on euphoria following FM’s corporate tax cut announcement. As stated in the last week’s bulletin, we expected that level to have been weakened after earlier three attempts to break above. On Friday the market cut through it with a single swoop. The next immediate area of supply is around 11600-11700. We expect the upward momentum to continue at least for a day before there is a pullback.

NIFTY Daily 23rd Sept 2019

However there is one interesting observation. Even after the massive rally in NIFTY on Friday, we see that the ‘Max Pain’ level calculated from open interest in the NIFTY options is still between 11100-11200 area. The max-pain theory suggests that “the option writers will hedge the contracts they have written. As the option expiration approaches, option writers will try to buy or sell shares of stock to drive the price toward a closing price that is profitable for them, or at least to hedge their payouts to option holders.” (https://www.investopedia.com/terms/m/maxpain.asp)

Max Pain Graph (Trading Options)

The above max pain graph is based on the open interest in NIFTY as of market close on 20th September, after the 5.3% market rally. Given that there are only four days before September options expiry, all the players with deep pockets have only limited time to minimize their losses. That’s why we believe that though the market would follow upward move as stated in the big picture, during this week we expect a pullback by Thursday to bring the market close to 11200, top of our earlier stated consolidation area. Once the options expire, further upward move can resume.

To explain max pain and how to calculate that, we shall write a separate article soon.

What Next?

For mid term we expect the market to continue move up. For a day the market will follow upward momentum, but by Thursday the market would have shown quite some correction as big traders in the options market would try everything to minimize their pain from option writing. Our hypothesis is that the market will retest 11200 level or close to that during this week before resuming move upward.

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