RANGE BOUND

LASTweek the traders may have benefited from the Nifty's move in a tight range of about 5080-5000 for most part of the week barring last two trading session when the index experienced bouts of intra-day declines. 

VISIBLE CONFIDENCE : The progress of the 20 and 50 Day Moving Average (DMA) which we talked about in the last diary ended into a negative cross-over. The market's behaviour in the last two trading sessions points to liquidation followed by a prominent short covering. However it's not only the last two trading days that highlight a somewhat confident state of the market. Comparing the daily change in the Nifty along with the November Put Call Ratio (PCR) also highlights this tone. As can be seen from the following chart even as the gains in the Nifty started to decay since last seven trading sessions, the November PCR has remained more than stable moving in a range of 1.60-1.80. 
STRIKING 5100 : Against this confidence however, threats to an upmove are the negative crossover between the crucial medium term indicators as well as the change in open interests of the November options. For the last week the highest open interest for the November series was gained by calls and in the money puts of 5100 strike. Moreover, the maximum open interest on the call side shifted to the strike price of 5100 from 5000 in the week previous to last. 
    As can be seen from the Nifty chart, the resistance at 5100 is highlighted by a developing trendline that joins Nifty's high in mid-October with the highs it made for most days of the last week. On the downside however, the presence of 50 and 20 DMA near 4950 and 4900 indicate a sound support range also emphasised by the rebound from these levels towards the end of the week. 
DOW'S CHALLENGE : The movement in the Nifty's US counterpart the Dow Jones Industrial Average (DJIA) will also play a key role for the former to mange its tempo. This is because as can be seen from the second chart, for the first four trading sessions of last week the dow's gains were capped by a trendline joining its highs since early May'09. Until the Dow is able to crack this trendline, the index faces a risk for a correction towards a lower trendline that not only joins its three major corrective lows since March'09 but also completes a rising wedge pattern with the first trendline mentioned. At the time of this article going to the press, the Dow was struggling to remain above its Thursday's close. 
SPIRIT OF THE DOLLAR INDEX : The Dow's hesitance to move past 10450 seems in conjunction with the US dollar index's behaviour in recent times. The dollar index (traded on the Intercontinental Exchange) is a gauge of the greenback's strength against a basket of major currencies like Euro, British Pound and Japanese Yen. This index has maintained a more than 90% negative correlation with the Dow since the market plunge of September 2008. As can be seen from the third chart, even after being on a prominent declining trend since May'09, the dollar index has taken a firm support near 74.70 in the last couple of weeks. For the strong negative correlation between the Dow and the Dollar index to sustain, the latter may have to fall below this support also as the negative crossover between its long-term weekly moving averages point towards a bearish outlook for the dollar. 
FRESH TRADE: Last week we suggested buying Nifty near 4950 with a stop loss below 4890 or a negative cross over between the 20 and 50 DMA. Since the negative crossover took place ahead of the Nifty's move towards the buying level, the call could be deemed to have not initiated. This week even as the key crossover is in place, due to the Nifty's behaviour last week we reiterate the buy call of last week, with a stop below 4890. 
    devangi.joshi@timesgroup.com