Budget 2022 And Nifty Technicals: Watch This 1,000-Point Range Closely

Budget 2022 seems to have sung a pretty decent aria, one the Finance Minister has been singing for a while now. One of the distinctive features of recent budgets is that there seems to be some sort of continuity about them, a factor that was often missing in earlier times.

The consensus was that it was a growth budget. The difference of opinions largely ranged on when that growth would kick in and what circumstances shall enable it. Thus, one of the big fears of the marketmen was allayed, that the budget would prove to be a big party pooper. There were a few that also hoped that it would pave the way for some brisk advances. Neither happened.

The market positioning ahead of the budget was interesting. As the January F&O series had just been completed before the event, it certainly can be used to assess possibilities. The first element seen was that Nifty Futures rolled over were the lowest in some seven months or so, with positions light at around 1 crore shares, compared to the usual around 2 crore. Early indications of option-shorting were missing for call options, implying that people didn’t really want to take a position.

As usual, the volatility index did go up ahead of the event but its upward path was also helped by the sharp decline in the later part of January. The immediate response of the VIX was to drop, post-budget. Its move ahead will certainly be indicating the comfort or otherwise of the traders. Below 17-18, the bulls will reappear while continuing or rising beyond 22 will see bears increase the pressure of their hug. The first chart shows the movement of the Nifty versus the India VIX. Seems like the market perhaps had wind of the benign nature of the budget.

Over the last three quarters, we have seen the much-awaited corrective moves appear in the Nifty and while the October-December fall was the largest with a 12% decline, there have been two other 8% declines. The more recent one was a lot more virulent with large price damages to stocks, mainly on account of persistent selling by foreign portfolio investors.

On the other hand, bruised bulls may want to see if the volume-weighted average price area of January of 17,650 can be regained and held. In the sharp rally of the last few days, the Nifty has rallied right into that zone and got caught in a small bind over the bond yield rising post-budget. But this VWAP area remains the key zone for bulls. They need to hoist the Nifty above this level and stay there if they have to rebuild their campaign.

I am still looking to buy the support zone area dip because the larger picture (weekly and monthly charts of Nifty) are far from surrendering the ground gained since the last two years. The FII longs in the Nifty are cut pretty sharply over the last month and they are currently a big net short, actually at their highest since March 2020. If something positive occurs, then mere short-covering can take markets higher while negative situations may not see long liquidations pressure values lower. For that, they would have to enter into fresh shorts. Not that they cannot, just that long-liquidation in a market where buyers are missing creates greater damage. The next chart shows the situation of FIIs in index open interest participation.

Please note that I have used the adjective ‘robustly’, so mere pokes beyond the bounds of the range will not be good enough. A good trend that has been in progress demands that we side with it rather than against it. Only new evidence can make that happen.

The stocks area too was interesting. Three-four major sectors govern sentiments and witness large participation by traders in F&O. Two of these, IT and pharma, were among the most drubbed sectors with a 13% and 9% decline in prices, respectively. Again, this is possibly owing to large FII ownership in these two sectors. The IT majors came out with some decent results and commentaries for Q3FY22, but the market remained unmoved. What is even more interesting here is that the overall sector open interest shot up by some 22% and this can be taken to mean that traders have accumulated short positions in the main names here. In contrast, pharma continues to see shedding in the OI, implying that long liquidations can still be in progress here but selectively some short-covering may be happening too. Pharma results have, so far, not really helped much. Hence, it will require some additional helping hands to create a sustained rally in the pharma stocks.

Banks and metals are the other areas of high interest. Banks saw price increase but OI shedding, implying that the higher levels may have been used to exit pending longs. On the other hand, metal stocks saw prices rise with a small addition to the OI base.

The next chart shows the Nifty versus the metals index. By end-December, metals were already making a higher bottom (i.e. diverging) and the pick-up on budget day was strong. Expecting this outperformance to continue ahead.

The focus on capex spending should doubtless bring the focus back towards cement stocks and we saw a few of them turning bullish on budget day. The fourth chart shows Nifty performance relative to ACC Ltd., India Cements Ltd., and UltraTech Ltd., three popular cement counters.

In an earlier article, I had pointed out the close relationship between the Dollar/Rupee and Nifty moves. Around the budget, there has been some sharp volatility in the USD-INR rate that has introduced some volatility into the Nifty too. While rallies in bond yields in the U.S. have been commented upon, we don’t really bother very much about the surge in bond yields in India.

The currency pair rallied some but not enough to spook the trends of the Nifty yet. The final chart shows the recent relationship between the Dollar/Rupee and the Nifty. So far, the Nifty seems in good form yet.

Summing up, a major event has concluded. The fear in some minds should dissipate now as the budget actually turned out to be better than expected. Possibly, gains may be a bit back-ended. But the market is famous for living in the future. Leadership may change post this budget, back towards the infra space. Implementation of the course of action mapped by the government would be the key to the sector and stock picks of the future. We continue to remain in a buy-dips market. I would expect February month-end Nifty levels to be much better than where we are today.

CK Narayan is an expert in technical analysis; founder of Growth Avenues, Chartadvise, and NeoTrader; and chief investment officer of Plus Delta Portfolios.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.