Correction Cramped

THENifty's decline of 4% in the first three days from the expiry of the October future was inline with the index's behaviour during the period of April-July 2009, when the rollovers were followed by an average price change of 4.4%. As we pointed out last week, for the duration of these four months, an average rollover of 65% was followed by a sharp price move that defined the bullish tone of the market. Now that October expiry has showed some analogous development, it is required to be seen whether a bearish tone will be set in the market. 
WEAKNESS PREVAILS: 
Though the Nifty has recovered 2% for the week, barring Thursday, the index's gains were accompanied by a decline in open interest and volume of the November future, signifying a not so confident stance of the traders. Similarly, the November future closed with an average discount of 5 points for all trading sessions except Thursday, when it closed with a premium of 5.4 points to the underlying index. Moreover, the stocks futures lost about 8 crore shares in theopen interest compared to a gain of 2 crore shares in the previous week when the Nifty declined by 6%. 
    While these observations highlight an apprehensive mood, the index's rebound from its 100 Day Moving Average (DMA) and a weekly close 
above the 20 Week moving Average 
(WMA) indicate that it will be difficult for bears to push the Nifty below the 
support range of 4700-4600. 
OPTIONS' CALL: In line with this performance, the change in open interest of the November options highlights the support in the mentioned range. For the week, in-the-money 4700 calls have gained the highest open interest of 16.3 lakh shares for any strike on the call side. Likewise, the November 4700 puts have added 16.4 lakh shares whereas 4600 strike have gained the maximum open interest of more than 24 lakh shares on the put side during the week. 
    Meanwhile, November 4900 strike hold the highest open interest (41.2 
lakh shares) amongst all call options 
although the highest open interest (59 lakh shares) for the put side, that of November 4600 puts, outweighs the same. 
NIFTY’S SUPPORTS: While these events on the options' side indicate a trading zone for the Nifty, 4800 seems to be the near term resistance which capped its gains on Thursday. This resistance is arrived at by a trendline joining the Nifty's intermediate highs during June-August 2009. As can be seen from the first chart, besides this resistance, the standing of the Nifty's 50 DMA near 4900 defines the struggle zone for the Nifty. 
DOW: A NEW RESPITE: As for its US counterpart, The Dow Jones Industrial Average (DJIA), the gains as on Thursday has been an impressive 3%. What adds to the importance of this rise is that with it once again it has managed to rebound from its 50 DMA as well as has managed to close abovethe key 10000 mark. Furthermore, due to this pullback a trendline has come into existence that joins the index's March, July and last week's lows. Since this trendline more or less coincides with the 50DMA, 9750 is expected to offer a strong support. 
    However, for the Dow's gains to extend it needs to move past 10100, a breach of which will make the former look towards 10350 as the ultimate resistance to crack and move past the trendline resisting its highs since April'09. At the time of this article going to press however, the US index is struggling to remain afloat its Thursday's close. 
DECLINE OF VIX: The Dow's recovery has come on the back of a decline in the Chicago Board Options Exchange Volatility index (CBOE VIX). As can be seen form the third chart, with this decline the VIX is standing at its 100 DMA. For Dow's sustained upmove, the VIX will not only have to move below its 100 DMA but also will have to fall into a wedge formed since May'09. 
FRESH TRADE: Last week we suggested shorting the Nifty on its close below 4630 if the Dow made a close below 4720. While the Nifty made a deep dive below 4630, the Dow's efficient rise kept the short call from initiation. Though the market sentiment seems somewhat weak, we expect the Nifty to take strong support in 4600-4700 range this week. Against this backdrop, one can long Nifty near 4710 with a stop below 4610, for a possible gain towards 4920-4940. 
    devangi.joshi@timesgroup.com 

 

 

 

 

 

 

 

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