Volatility Threat Looms as Bullion Crash Spills Over into Equities
Market expert Vijay L. Bhambwani has issued a stark warning about potential volatility spikes in the coming week, highlighting how the recent dramatic crash in bullion markets could trigger panic sales in equities. In his latest analysis, written before the budget presentation, Bhambwani notes that while geopolitical tensions seemed to abate last week—with Iran signaling openness to peace talks and Russia-Ukraine negotiations appearing possible—new risks have emerged from the commodity markets.
The Bullion Domino Effect
The gold and silver markets experienced a breathtaking collapse on Friday, with bullion falling 20% in a single trading session—a decline that technically pushes it into bear market territory according to Dow theory. This crash creates a real danger that the massive losses in bullion long positions could spill over into equity markets, potentially triggering widespread panic selling.
Bhambwani specifically highlights the risks associated with margin-funded purchases of bullion exchange-traded funds (ETFs). "Buyers must pay 30% of the value of bullion purchased through MTF and maintain a 30% share of the investment, whereas the broker funds 70%," he explains. With Friday's 30%+ price decline, many investors' share has fallen to zero, potentially triggering margin calls and system-wide sell-offs unless retail buyers replenish their accounts before Sunday morning.
Market Sentiment and Technical Indicators
Despite the previous week's gains—led by Bank Nifty with Nifty following—several indicators suggest underlying caution among traders. The US dollar index fell last week, providing a sentimental boost to emerging markets including India, but multiple factors are creating headwinds.
Bhambwani's analysis of retail risk appetite reveals subdued conviction levels. The turnover contribution in the highly capital-intensive futures segment remained subdued even during expiry week, while options trading showed higher activity in the more volatile stock options series. Overall, these patterns point toward below-average risk appetite in the F&O segment.
Technical Analysis and Key Levels
The Nifty's technical picture shows mixed signals. While the advance-decline ratio improved to 1.34 (from 0.85 the prior week), indicating 134 gaining stocks for every 100 losing ones, other indicators suggest caution. Market-wide position limits fell after expiry, with the low marginally lower than the prior monthly expiry, suggesting swing traders were waiting for budget proposals before increasing exposure.
Bhambwani's proprietary 'impetus' indicator, which measures the force behind price moves, showed that Nifty rallied on lower momentum last week, possibly due to short covering rather than strong buying conviction. "It is important that both indices move in unison, otherwise, the markets risk high volatility," he warns.
Budget Impact and Commodity Shifts
With global investors losing confidence in fiat currencies, Bhambwani observes a shift toward materials and commodity resources. This could push gas and oil prices higher as money moves out of bullion into other assets. However, he maintains his long-standing hypothesis that there is no supercycle in oil and gas, noting that while seasonal factors will trigger periodic upthrusts, stratospheric price levels being discussed appear premature.
Industrial metals also sold off viciously last week, and Bhambwani doesn't subscribe to a supercycle in base metals either. He distinguishes between bull markets—which are volatile and can terminate without warning—and supercycles, which feature sustainable uptrends with little or no corrections.
Trading Strategy and Outlook
For the coming week, Bhambwani expects public sector undertakings (PSUs) and banks to continue attracting attention due to their weight in headline indices. However, he advises trading light as volatility is likely to be elevated, with commodity exchanges having sharply raised span margins.
Key Nifty levels to watch include 25,675 as resistance and 25,000 as crucial support. Bhambwani notes that Nifty fell below the 25-week moving average last week, indicating nervous medium-term outlook. The weekly bullish candle being contained within the prior bearish candle suggests market indecision and consolidation ahead of the next move.
For Bank Nifty and Nifty, Bhambwani estimates ranges of 60,800–58,400 and 25,800–24,825 respectively. He emphasizes maintaining strict stop losses, avoiding trading counters with spreads wider than 6 ticks, and continuing to deploy tail risk (Hacienda) hedges for protection against extreme market moves.
Fixed Income and Broader Implications
Fixed-income investors should remain cautious amid rising 10-year benchmark yields in India over recent weeks. Bhambwani suggests waiting for better yields before deploying funds, noting that higher bond yields have been capping gains in the Bank Nifty despite the broader rally.
The analysis concludes with a reminder that these observations were made before the budget announcement and after the bullion crash that occurred late Friday night. "These are wildcards that need to be factored in," Bhambwani notes, adding that should the budget be market neutral-to-positive and bullion stabilize, buying sentiment could improve relatively.
