Trade Setup for May 7: Is the rising VIX posing a threat to Nifty’s recovery?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Nifty is struggling to sustain at intraday highs. This is a trend witnessed through most of the last 10 trading sessions, particularly in four out of the last five. Even after opening with steady gains and building on them during Monday’s session, the index began to turn downwards within 15 minutes of trade starting. Eventually, the Nifty ended 150 points of the day’s high of 22,588.

Multiple factors contributed to the sour sentiment on Monday despite global cues being very positive. The Reserve Bank of India’s draft guidelines on project financing sent PSU Banks tumbling down with the index falling nearly 4% in its biggest single-day drop in two months. The PSU Bank index shed market capitalisation worth ₹57,000 crore on Monday.

The other sector impacted due to the RBI draft guidelines were power financiers. REC, PFC and IREDA fell anywhere between 4% to 9% on Monday. You can read more about them here.

Losses seen in the Smallcap universe, Metals and Media stocks, offset the gains reported by FMCG, IT and Real Estate.

Another worrying factor for the bulls will be the rise in the India Volatility Index (India VIX), which hit a 52-week high on Monday. Just a few sessions earlier on April 23, the index had declined 20% in a single session to slip below levels of 10. Since then, it has risen 70% in eight sessions to hit levels over 16 on Monday. More on that here.

Foreign investors remained net sellers in the cash market on Monday, while domestic institutions were net buyers, albeit for a smaller quantum.

The Nifty is currently placed at the support between 22,400 and 22,300 levels and is not able to sustain its intraday upside bounces, said Nagaraj Shetti of HDFC Securities. The short-term trend of the Nifty is negative but he sees the possibility of an upside bounce in case 22,300 is held on the downside. A slip below that may trigger further weakness.

Shrikant Chouhan of Kotak Securities said that the index has formed a bearish candle on the intraday charts and is holding the lower top formation, which is largely negative. As long as the Nifty remains below 22,600, the chances of it falling to 22,300 – 22,250 levels are higher. On the flip side, only a move above 22,600 can take the index back to 22,735 levels.

Asit C Mehta Investment Intermediates’ Neeraj Sharma is of the view that the Nifty has formed a bearish engulfing candlestick pattern, followed by today’s red candle, indicating further weakness. A slip below 22,340 can take the index down to 22,100 or even 22,000 levels, he added.

While 50,000 was almost in sight for the Nifty Bank just last week, the index is now struggling to hold on to levels of 49,000. Although less choppy than the Nifty, the banking index traded in a 500-point band and was mainly dragged lower on Monday due to the underperformance of PSU banks.

48,300 is an important level for the Nifty Bank and as long as that holds, the overall trend remains positive, said Om Mehra of SAMCO Securities. He expects the Nifty Bank to remain sideways in a 48,300 – 49,300 range. Only a move on either side of this range can determine the further trend for the index.

Kunal Shah of LKP Securities said the immediate resistance for the Nifty Bank is at 49,300 and a move above that can trigger further upside towards 49,500 levels. On the flip side, a break below 48,900 may induce further selling pressure.

What Are The F&O Cues Indicating?

Nifty 50’s May futures added 5.7% and 6 lakh shares in Open Interest on Monday. They are now trading at a premium of 107.45 points from 99.35 points earlier. On the other hand, Nifty Bank’s May futures added 2.4% or 47,640 shares in Open Interest on Monday. Nifty 50’s Put-Call Ratio is now at 0.85 from 0.89 earlier.

SAIL has entered the F&O ban, joining Aditya Birla Fashion, Biocon, Vodafone Idea, Balrampur Chini and GMR Airports.

Nifty 50 on the Call side for May 9 expiry:

On the Call side, the Nifty 50 strikes between 22,500 and 22,800 have seen Open Interest addition for this Thursday’s weekly expiry.

Nifty 50 on the Put side for May 9 expiry:

On the Put side, while the 22,300 and 22,400 strikes have seen Open Interest addition, the 22,700 strike has seen shedding for this Thursday’s expiry.

These stocks added fresh long positions on Monday, meaning an increase in both price and Open Interest:

These stocks added fresh short positions on Monday, meaning a decline in price but increase in Open Interest:

Short covering was seen in these stocks on Monday, meaning an increase in price but decline in Open Interest:

Unwinding of long positions was seen in these stocks on Monday, meaning a decline in both price and Open Interest:

These are the stocks to watch out for ahead of Tuesday’s trading session:

• Godrej Consumer Products: Revenue of ₹3,385.6 crore, slightly higher than the CNBC-TV18 poll of ₹3,327 crore. EBITDA of ₹755.7 crore, also slightly higher than the poll of ₹731 crore. EBITDA margin of 22.3% versus the 22% estimate. The company reported a net loss of ₹1,893.2 crore compare to a net profit of ₹452 crore last year. The loss was due to an exceptional item of ₹2,375.6 crore. The exceptional loss includes an impairment loss of ₹1,390.8 crore towards brand and goodwill for Africa and ₹927.2 crore relating to a loss on sale of subsidiaries and business in East Africa post a change in business model and long-term strategy for Africa. It also includes a ₹71 crore loss on account of other group restructuring costs, stamp duty payment and other costs relating to the acquisition of Raymond’s consumer care business worth ₹87.8 crore. Overall volume growth at 12% and India business volume growth of 15% year-on-year. Indonesia business volume growth of 12%.
• Hindalco: Novelis net profit up 6% to $166 million, revenue down 7% to $4.1 billion. Adjusted EBITDA up 28% from last year to $514 million. Rolled product shipments up 2% to 951 KT. Adjusted EBITDA per tonne shipped up 25% from last year to $540. Net leverage ratio of 2.3x. Sales fell due to lower average aluminium prices and partly offset by higher total shipments. Generated $1.3 billion in operating cash flow.
• Lupin: Revenue and profit misses estimates while margins meet expectations. Margins sustain above 20% for the second quarter in a row. US Sales at the lower end of the estimate of $209 million and decline from $212 million last quarter. US sales estimates ranged from $209 million to $235 million. India business grows only 8% versus 10% growth estimate. Higher depreciation and lower other income impacts profit.
• HPCL: Board meet on May 9 to consider bonus issue of shares.
• Gujarat Gas: Net profit of ₹409.5 crore, higher than the poll of ₹326 crore. Profit up by 86.1% year-on-year. Revenue at ₹4,134.2 crore, higher than the estimate of ₹4,076 crore. EBITDA of ₹591.1 crore, up 47.5% and higher than the estimate of ₹533 crore. EBITDA margin expands to 14.3% from 10.2% last year and beats estimates of 13%.
• DCM Shriram: Net profit down 36.9% from last year to ₹117.8 crore, revenue down 11.8% to ₹2,399.3 crore. EBITDA down 22.7% to ₹313.1 crore. EBITDA margin narrows to 13.1% from 14.9%. Chemicals business revenue drops 28% with volumes falling 6%. Vinyl business revenue drops 8% but volumes grow 10%. Fertilisers business revenue drops 17% and volumes decline due to maintenance shutdowns in March 2024. Revenue drops due to lower gas prices. Capex in the chemicals business is nearing completion. Commissioned a 850 TPD chlor-alkali project and other projects will be commissioned over Q1 and Q2 of financial year 2025.
• Muthoot Microfinance: Disbursals up 18% from last year to ₹2,887.9 crore. AUM growth of 32.4% to ₹12,193.5 crore. Gross NPA flat at 2.29%, Net NPA also flat at 0.35%. Net Interest Income up 49.4% from last year to ₹331.7 crore. Net profit up 26.5% to ₹119.8 crore.
• Suven Life: Revenue at ₹238 crore from ₹261 crore last year. EBITDA loss of ₹30.3 crore from loss of ₹31.5 crore. Net loss at ₹26.54 crore from loss of ₹27.64 crore last year.
• Lupin: Gets USFDA approval for Travoprost Ophthalmic Solution USP, a drug used to treat increased pressure in the eye caused by open-angle glaucoma or hypertension of the eye. Travoprost Ophthalmic Solution had estimated annual sales of $77 million in the US as per the IQVIA data of March 2024.
• Gujarat Fluorochemicals: Net profit down 69.6% to ₹101 crore. Revenue down 23% to ₹1,133 crore. EBITDA down 55.1% to ₹237.6 crore. EBITDA margin at 21% from 36% last year.
• Tamilnad Mercantile Bank: Hikes lending rates by 10-15 basis points across tenors.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow