Nifty 50 Takes Support from 17,400; Volatility Spurts Ahead of Budget!
The sharp sell-off in the broader markets primarily on account of Hindenburg Research’s report on the Adani Group alleging the ‘biggest financial fraud in corporate history’ jittered market participants. In fact, offshore listed bonds of the group also witnessed a noticeable plunge while Gautam Adani’s ranking in the Forbes Billionaire list fell from no. 3 to no. 8, with his current net worth at US$88 billion.
There’s no doubt that the recent Adani Group fiasco, coupled with tomorrow’s Budget day and the US Fed’s first FOMC meeting of the year’s outcome on the same day (the effect to be reflected on 2 February 2023 on the Indian markets) have all increased the volatility of the benchmark index. The shot from around 13.6 on 24 January 2023 to a high of 19.39 yesterday. It’s rare to see such as sharp rise in volatility in a very short span of time (3 trading sessions).
Image Description: Daily chart of Nifty 50 (spot) with the ATR at the bottom
Image Source: Investing.com
Another way to gauge the volatility of the index is via the ATR (Average True Indicator) indicator. The 14-day ATR of Nifty 50 yesterday hit 208 (the highest since October 2022), which was 179 on 24 January 2023, reflecting an 18% increase in the 14-day average range (irrespective of direction) of the index.
The reason to emphasize volatility is to caution traders of heightened risks in the current environment. Looking at the chart itself, it’s relatively easier to gauge the support and resistance levels, but not so easy to trade as the range has expanded. For instance, the nearest support is now at 17,400 and the resistance is around 18,200. This is a big 800-point range. A decent resistance is also present at 17,800 which was the earlier support level, but even if someone initiates a short position at this level, there aren’t any logical stop-loss levels before 18,200.
The thumb rule to trade during volatile periods is to increase the stop loss levels and reduce the position size, which helps to minimize whipsaws on account of high volatility. Options data is suggesting there is a possibility for the Nifty 50 to scale to 18,000 by coming Thursday as 18,000 CE holds the highest open interest (OI) of 2.15 lakh contracts. The immediate resistance of 17,800 also holds a high OI of 1.22 lakh contracts.
On the downside, the OI on puts seems relatively lesser than the OI on call options. None of the strikes holds an OI over 1 lakh, apart from 17,000 PE which has 1.15 lakh contracts. This indicates put option writers are refraining to sell options fearing a sudden sharp move, indicating the downside might still be open.