It’s Building Up, Now

SHAKTI SHAN K AR PATR A ET INTELLIGENCE GROU P

FOR ADVENTUREsports enthusiasts, India can be a very frustrating place. But thanks to the madly gyrating equity market, we now have a surrogate in place. For, if just last week is taken into consideration, the moves have been nothing short of a bungee jump. We had the initial free fall, then the strong rebound and to make things complete, the rebound
stopped just short of the peak from which the jump had begun. Incidentally, for many, the rebound was more enjoyable and thrilling than the free fall, as is typically the case in a bungee jump, contrary to popular belief.
THE VIX POLE VAULT: With almost a consensus in the market that the previous bottom at 3848 will act as a support and that all hell will break lose if that's broken, the market saw a never-before-seen fight between bulls and bears in the last hour on Tuesday. As frantic efforts by bears to hammer this last nail in the bull's coffin succeeded, a plethora of shorts got piled up in that eventful last hour, as the market sensed an apocalypse. What this also meant was that volatility shot up through the roof — the India VIX (the volatility index of Nifty options) witnessed its highest ever single day jump, as it shot up by a whopping 57.95% on Tuesday. But with the expected catastrophe not materialising, the VIX gave up all of its gains and some more, even though the Nifty actually ended in the red the next day. What was even more interesting is that more than 50% of the fresh shorts initiated on Tuesday used the small fall on Wednesday to bail out. This was evident in Nifty July futures, which shed around 8 lakh shares in open interest — probably they got a whiff of what was to follow.
BULLS STILL IN HIBERNATION: While the stupendous upmoves in the last couple of days of the week brought in a lot of relief for hapless bulls, there's enough evidence to suggest that the show is still being run solely by bears. While a whopping 35 lakh shares, or 10%, of the total open interest was shed on Thursday, hinting at just one thing — short covering, even Friday's upmove didn't see any respectable long build-up. In fact, each of the top five gainers on the Nifty on Friday — ICICI Bank, HDFC, HDFC Bank, DLF and Bharti — saw a trimming of open interest in their July futures. This is yet another evidence of short
covering. So, although bulls have made a huge statement in the past two trading sessions, it's the bears, who are clearly dictating the terms. And bulls seem to be still at the mercy of bears, who seem to make them dance to their tunes. FREEDOM AT LAST: The 20 DMA (daily moving average) is often considered as the best short-term trend indicator. After falling below that on May 22, the Nifty had made multiple attempts to take it out — once on June 18 and again on July 11. But the failure of all such attempts meant that before Friday, it had spent 41 hapless nights below its 20 DMA — the longest span in more than a decade. No wonder, it had lost a whopping 25% in this period. Now, with the 20 DMA conquered, bulls have definitely taken the first step in redeeming themselves.
FRESH TRADE: While everything seems to be in place for a decent relief rally, the biggest set-back for it continues to be the lack of any substantial long build-up. On most days, when the market cracks, one sees the build-up of shorts and on the rare occasions when it goes up, all one sees is that some of these shorts are getting covered. At the same time, the Nifty is still in its bear market avatar, consistently making lower tops and lower bottoms. However, the bear stranglehold over the market clearly seems to be waning with each passing day. And now with the 20 DMA conquered, it just seems to be a matter of time, before bulls come back strongly.
    So, if and when the last top at 4216 is taken out, bulls should ideally use it as a trigger to go long, with a stop loss at the 20 DMA. In fact, with a considerable improvement in the health of equity markets the world over, there seems to be enough reason for the Nifty to make a decent recovery. The fact that even far out-ofthe money call options like the 4300 call and the 4400 call saw unwinding on Friday, suggests that the Nifty can even go on to test its 50 DMA, which is at around 4492. At the same time, this long trade should ideally be made only if the conquest of 4216 is followed by a build-up of long positions in Nifty futures. As for the bears among you, enjoy the gains of the past couple of months because opening up fresh shorts or averaging the bad ones above the 20 DMA can only further fuel this probable rally.
    shakti.patra@timesgroup.com