ITturned out to be a mirage again. The Nifty once again failed to embark into what could have been called as its journey into another bull market with a failure to close above 4700. By the end of the last week, the scenario in the derivatives market changed completely with the open interest in August futures rising while volume experiencing a dip.
The movement of put call ratio for August series from 1.15 at the start of the week to 1.24 on Wednesday to 0.98 on Friday indicates the shift in stance of the traders. What started on Thursday as a liquidation of long position with a decline of nearly 3% in open interest as well as price and a rise of 17% in volumes of August futures, turned to a bearish sell off on Friday. This is validated by a simultaneous decline in price and volume on Friday while the open interest recovered its previous day's decline.
NIFTY SHORT-TERM
With a close below 4600, the Nifty has fallen under its 10 day moving average (DMA), reflecting a short term bearish trend. However, it is encouraging that on Friday it took a support from its 20 DMA (4469). As long as the Nifty avoids a close below 20DMA, the medium term trend would remain unchanged for the index. This is also because the positive cross over between 20 and 50 DMA, which we were monitoring from last couple of weeks, is in place now.
As on Friday, the open interest in the 4300-4500 August put series is an average of 27 lakh shares, while 4500 puts hold the maximum open interest on the put side. This indicates that the range is a very strong support zone.
On the other side, open interest of more than 70 lakh shares in 4700-4800 calls constitutes nearly 33% of the total open interest in the August series calls. This indicates that with last week's development, 4700 still remains a very difficult level to crack.
FIBONACCI FACET
While 4700 remains the technical threshold for an entry in to the bull market, 4800 posts another key level for Nifty to crack. This is because as seen from the first chart, 4800 encompasses the 61.8% Fibonacci retracement level of the latest bear market plunge from January 2008 to October 2008. 61.8% is considered as the most vital retracement level and hence to crack it on the upside could turn out to be a tough task for the Nifty.
On the downside, the 50% retracement is present at 4305, highlighting the importance of 4300 as a support especially given that in the last week, August 4300 puts added maximum open interest compared to others.
A LOOK AT THE DOW
In the week even as the Nifty lost more than 3%, at the time of this article going to press, the Nifty's US counterpart, the Dow Jones Industrial Average ( DJIA) is trading with a 2.5% gain for the week.
Last week the sluggishness in Dow triggered the sell off in domestic market. This sluggishness was owed to the way the Dollar index is behaving. The dollar index (traded on the Intercontinental Exchange) is a benchmark to gauge the strength of the greenback against a basket of six currencies that includes majors like Euro, British Pound and Japanese Yen.
Historically while the Dow has maintained a 60% negative correlation with this index, since the market plunge of September 2008, the same has further increased to a negative correlation of 90%.
The dollar index moved to its December 2008 lows (77.50) last week, putting the Dow into a struggle to move past 9400. So for the Dow to move past 9400 and take global markets into the bull run, either the dollar index would have to breach past 77.50 or the negative correlation between the two would have to weaken.
HISTORY: REPEATING OR RHYMING?
With the broader market declines last week, talks of whether the rally since March 2009 would materialize into another bull market or would turn out to be a fabricated enthusiasm have again surfaced. Since the recent recession is compared to the great recession of 1930s, it is interesting to compare the movement of Dow during both these recessions. The third chart shows, that the plunge in Dow since October 2007 almost mirrored the index's fall in the earlier duration of the great depression. However the strong recovery (point B) arrived earlier in the latest case considering the number of trading days. Since this point the movements in Dow in the recent cycle are taking longer duration to replicate the same in the first cycle and in turn support hopes of a divergence.
FRESH TRADE
All in all, we believe that even if cracking 4700-4800 could be a tough job, a fall below 4300 doesn't look imminent either. Given that the 50DMA is present at 4410, one could go long near this level to benefit on possibility of Nifty's another attempt to move closer to 4700 while keeping a strict stop below 4280.
devangi.joshi@timesgroup.com
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