TA experts had foreseen surge
The unstoppable super-surge in the BankNifty and Nifty has baffled fundamentalists.
However, some technical analysts had foreseen the situation and had sent a timely alert.
Jayesh Khilnani, an expert with ETNow, had alerted, as far back as in August 2020, that the Nifty has formed a “golden crossover“.
He pointed out that in the past 20 years, there have been 13 times where the Nifty has exhibited the signs of a “golden crossover“.
Of these 13, there were 8 times where the Nifty surged and only 5 where it failed.
The average gain from the crossover is a hefty 6.7% over the next 100 days.
This analysis appears to be more or less correct because since the alert, the Nifty has surged from 11466 to 12263, an increase of 6.95%.
Nifty's "Golden Crossover" Analysis
LAST 2 DECADES
Total Golden Cross events = 13
Total winning trades = 8
Total losing trades = 5
Average gain over next 100 days = 6.7% #Nifty #StockMarket #India #equities #Charts pic.twitter.com/vH7lKxA44q— Jayesh Khilnani (@jayeshkhilnani) August 24, 2020
(The Nifty surged 800 points (6.95%) since it made the “golden crossover”)
BankNifty has also now made the golden crossover
The BankNifty has so far been under-performing the Nifty owing to fears of NPAs, interest waiver controversy etc.
However, it appears to have regained its MOJO and is surging and playing catch up.
Jayesh Khilnani pointed out that BankNifty has also now made the golden crossover.
This is the first time it has happened since November 2019.
Nifty Bank made golden crossover this week https://t.co/NMR2W7SAuQ
— Jayesh Khilnani (@jayeshkhilnani) November 6, 2020
He also explained that out 15 times in the past 20 years, 9 have been winners and 6 have been losers.
The average gain in each trade is 8.25%, which is quite hefty.
NIFTY BANK BACK TO GLORY DAYS
50-DMA crosses above 200-DMA
Made golden cross first time since 20 Nov 2019LAST 2 DECADES
Total no. of golden crosses = 15
Total no. of winning trades = 9
Total no. of losing trades = 6
Average gain in each trade = +8.25% https://t.co/eousxcLMat— Jayesh Khilnani (@jayeshkhilnani) November 6, 2020
Other experts have corroborated this viewpoint
The surge in Bank stocks in the week gone by has been quite dramatic.
ICICI Bank has rallied 13% this week, while Kotak, HDFC and Axis Bank gained between 10% and 12%.
IndusInd Bank, which was a pariah so far, has surged an eye-popping 26%.
Chandan Taparia, the noted expert with Motilal Oswal, confirmed that the “golden crossover” has indeed happened.
“Bank Nifty has been making higher high – higher lows from the last five trading sessions and witnessed a golden crossover after one year as 50 DMA (daily moving average) crossed above 200 DMA which has bullish implication to drive the next leg of rally,” he said.
He opined that until the BankNifty holds above 26,000, all declines should be bought.
He predicted that the BankNifty is headed to the zones of 27,500-28,000.
Binod Modi of Reliance Securities pointed out that the surge is not surprising given the strong earnings from some of the leading banks.
“A sharp recovery in banks and financials after the strong September quarter earnings with favorable management commentaries aided financials to witness sharp rebound for the last couple of days,” he said.
He also pointed out that asset qualities of banks have remained steady and/or improved during the quarter along with a positive outlook of credit costs in subsequent quarters.
Further, the sharp under-performance of financials until October have caused the valuations of many banks to be reasonable, he added.
Nifty Bank forms Golden Crossover, could go up by another 5% in a week #ETMarkets #MarketsNews #BizNews #MarketsUpdate https://t.co/1zLVfFJaRw
— ETMarkets (@ETMarkets) November 7, 2020
Short-covering will also aid the surge
I have already pointed out that many traders had created short positions in anticipation that the uncertainty over the Presidential elections in the USA would cause the markets to crash.
However, the reverse has happened and so the traders have no option but to unwind their short positions ASAP.
According to Anil Singhvi and Nitin Murarka, the covering of the shorts will propel the markets to surge further.
निफ्टी के निशानेबाज नितिन मुरारका की निफ्टी ऑप्शन से कमाई की दमदार स्ट्रैटेजी#Nifty #BankNifty @AnilSinghvi_ @nitinmurarkasmc pic.twitter.com/ubxdX8pId3
— Zee Business (@ZeeBusiness) November 6, 2020
What is the best way to play the expected surge?
According to Nitin Murarka and other experts, the best way to play these expected moves is with ‘risk defined option strategies‘.
They have cautioned that buying Naked Calls is a risky strategy because if the expected surge does not come in time, the Calls lose value dramatically.
Instead, the safest way is to initiate a “Bull Call Spread” under which we buy an ATM Call and sell an OTM Call.
This ensures that the potential gain and loss are both precisely defined, without any scope for nasty surprises.
Also, the capital required to initiate these strategies is quite minimal at about Rs. 25,000 per lot or thereabouts.
The entire concept has been explained in a brilliant manner by Seth Freudberg of SMB Capital. He has also pointed out that the return on capital is much better in risk defined strategies than it is for naked calls and puts.
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