Where Is the Market Headed in the First Month After Modi's Victory? - Profit Hunter by Equitymaster
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Where Is the Market Headed in the First Month After Modi's Victory?

Jun 7, 2019

Apurva Sheth, Editor,Profit Hunter Pro

What happens when you put a bunch of market enthusiasts in a room to discuss the markets for two hours?

They will exceed the stipulated time without fail.

Last week, I was at the Mumbai Chapter Meeting of the CMT Association - that is the association of Chartered Market Technicians.

The meeting which was scheduled to end at 7 pm, but of course, with all the expertise and opinions around the table, couldn't help but last till 9 pm.

It was a great learning experience for me, and I brought back many insights to share with my readers.

One of my biggest takeaways for me - after talking to the participants including traders, analysts, fund managers and investment advisors - was this...

Everyone is super bullish in the markets after the Modi victory.

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Some even went to the extent of saying that the recent breakout above 12,000 in the Nifty is likely to be an inflexion point of an explosive kind which could take the markets much higher than where we are right now.

But the markets are neither going up in a straight line nor in a hurry.

The ride is never smooth nor without any speed breakers. And that's why I make it a point to chart out the way markets could be headed every month after the futures and options (F&O) expiry for my Profit Hunter Pro readers.

We concluded the F&O expiry for the May series last week. I focused on the data points to see where the markets could be headed in the first month after the Modi victory and shared my views with Profit Hunter Pro readers last week.

Today, I want you to have a glimpse of the same.

So, let's begin with rollover data...

Rollover refers to traders shifting their future contracts positions from the May (M1) to June (M2) expiry in Nifty futures contracts. A lower than average rollover normally signals uncertainty while higher rollovers show that sentiment is strong.

The rollover formula tells us the percentage of contracts rolling into the June expiry from the total contracts outstanding popularly known as open interest (OI).

Now here's the formula to calculate the rollover %: Next Month OI (M2)
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Near Month OI (M1) + Next Month OI (M2)
Date M2 M1+M2 Rollover OI (M2+M3)
28-Feb-19 14,261,625 24,108,600 59% 14,928,600
28-Mar-19 16,909,575 25,940,025 65% 18,116,550
25-Apr-19 19,222,275 23,795,250 81% 20,000,325
30-May-19 18,787,875 26,275,875 72% 19,190,325

The Nifty rollovers stood at a massive 72%, which is higher than the previous three-month average of 68%. Open interest (OI) has also decreased marginally to 1.91 crore contracts from 2 crore in the previous expiry.

Higher than average rollovers indicate market participants decided to carry forward their long positions suggesting continuation of the trend. A marginal dip in the OI suggests a slight tapering off in the enthusiasm amongst buyers.

Now, let us check out the options data and figure out the crucial levels to watch out in the index.


On the options front, call writers have concentrated their activity on the 12,000 and 12,500 strike. All the other strikes between these strikes have limited open interest concentration.

The highest put open interest concentration is at the 11,500-strike followed by 11,000 strike.

The open interest concentration has shifted higher since the market has broken out to new life-time highs. The trading range for the month is 11,500 to 12,000. We must watch out for options activity in the 12,000 strike whenever the market breaks out again for further cues on the direction.

Now let's check out Nifty's daily chart...

 

The index began the month on a wobbly note and slipped closer to levels of 11,100 which is also a gap support and bounced back.

The markets got an early sense of a Modi victory and started moving up even before the exit polls results were announced.

The index opened with a gap up on 20th May and registered its biggest ever gain in six years.

By the time actual election results were announced markets had almost factored in everything and the element of surprise was short-lived as markets ended in the red on 23rd May as per my expectations.

Markets have been trading in a range with a positive bias since then and even crossed the 12,000 mark on an intraday basis today but couldn't sustain above it for long.

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The volumes have picked up suggesting buying interest is coming back in the markets. However, RSI continues to display bearish divergence with price suggesting fatigue.

So, we cannot rule out a dip down to levels of 11,600. However, the gap created on the day exit polls were announced could halt the fall. Traders could look forward to lap up any such opportunity to buy on dips.

Thus, all the above suggests the positive sentiment is likely to continue in the markets.

That said, one cannot rule out a small correction which can happen anytime during the month.

However, such corrections could be short lived as new buyers will chip in to the very first opportunity they get and drive the index higher once again.

Whenever such corrections occur will offer great opportunity to get into trading with fundamentally strong stocks. If you want to get a pie of the action then Profit Hunter Pro is the place to be where I aim to pick the right stocks at the right time.

Apurva Sheth
Apurva Sheth
Editor and Research Analyst, Profit Hunter Pro

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