In our previous analysis, we explored the dual momentum top and identified key resistance levels for Bank Nifty. Recently, a divergence between Bank Nifty and Nifty has been observed. While Nifty continues its upward momentum, Bank Nifty has been on a downward trajectory. This divergence appears to be temporary, and Bank Nifty is likely to start outperforming Nifty as the July series concludes.
Market Profile Analysis
Current Observations
The recent Market Profile chart of Bank Nifty reveals several critical insights, with a major focus on the AB Poor High and the current trading inventory structure.
- AB Poor High:
- The AB Poor High is a significant level on the chart, indicating a primary short-term target. This level suggests that Bank Nifty is nearing a bottom, signaling an oversold condition. When the market reaches such extreme levels, it often marks a potential reversal point.
- The AB Poor High is a significant level on the chart, indicating a primary short-term target. This level suggests that Bank Nifty is nearing a bottom, signaling an oversold condition. When the market reaches such extreme levels, it often marks a potential reversal point.
- Current Structure: Short to Too Short:
- The current market profile structure indicates that the trading inventory is skewed towards short positions, with many traders holding excessive short positions. This overextension can lead to a short-covering rally as traders adjust their positions.
Understanding Trading Inventory
- What is Trading Inventory?
- Trading inventory refers to the positions held by traders at any given time. These positions can be either long (buy) or short (sell). Inventory imbalances occur when there’s a significant skew in the number of long or short positions, leading to potential market distortions.
- Trading inventory refers to the positions held by traders at any given time. These positions can be either long (buy) or short (sell). Inventory imbalances occur when there’s a significant skew in the number of long or short positions, leading to potential market distortions.
- Inventory Getting Short to Too Short:
- When the market’s trading inventory becomes predominantly short, it means that many traders are betting on a decline. If the inventory gets “too short,” it indicates an extremely oversold condition. In such scenarios, any positive news or technical reversal can trigger a short-covering rally, where traders rush to cover their short positions, leading to a sharp upward move.
Implications for Bank Nifty
- AB Poor High as a Short-Term Target:
- The AB Poor High indicates that Bank Nifty is nearing a bottom. This level is crucial as it marks an area where the market is likely to find support. Traders should be cautious about shorting the market at these levels, as the risk of a reversal is high.
- The AB Poor High indicates that Bank Nifty is nearing a bottom. This level is crucial as it marks an area where the market is likely to find support. Traders should be cautious about shorting the market at these levels, as the risk of a reversal is high.
- Oversold Conditions and Risk of Shorting:
- The current oversold conditions in Bank Nifty suggest that the market is at extreme levels. The risk of shorting at these levels is high because any adjustment in trading inventory could lead to a rapid upward move. Traders should be prepared for potential short-covering rallies.
Conclusion
The divergence between Bank Nifty and Nifty, highlighted by the recent Market Profile analysis, provides an intriguing setup for traders. The focus on the AB Poor High as a primary short-term target suggests that Bank Nifty is nearing a bottom. The current oversold conditions and the trading inventory being too short indicate a high risk of shorting the market at these levels.
As we approach the end of the July series, it will be crucial to watch for any signs of inventory adjustments and potential reversals. Traders should be cautious and consider the high probability of a short-covering rally in Bank Nifty. Stay tuned for more updates as we continue to analyze the evolving market dynamics.
