Down But Not Out

LIKE A PENDULUM  In the last two months there have been many occurrences when the markets showed a crucial positioning. On nearly four such instances since mid-July, it appeared as if the dilemma over an entry into the bull market or a continuance of the bear market will be resolved. Alas, there was no such outcome while the Nifty continued to trade in a broad range between 4700-4300.      Last week the sentiment remained subdued even as the coveted 4700 mark was breached thrice out of five trading sessions. On days when open interest and volume of September future experienced a simultaneous rise the Nifty ended the day in negative. On days when the index closed with marginal decline or with a gain, the open interest showed a marginal rise. This indicates that while for most part of the week the stance was bearish, the gain on Friday was on account of short covering.  OPTIONS - DEFINING THE RANGE  The variation in the open interest of the September series option validates this sentiment. For instance, the September Put Call Ratio (PCR) fell from 1.46 on Monday to as low as 1.20 on Thursday, only to end the week at 1.43.      While the daily highest open interest for the September series puts fluctuated between 4500 and 4600 strikes, the same for calls swung in the strike range of 4700-4900. During the week, the September 4800 calls and 4600 puts accumulated the highest open interest on the respective side, outlining the boundary for a decisive breakout.      This boundary can be further delineated by comparing the gain in open interest of near term in-the-money options. In-the-money 4700 puts gained 11.7 lakh shares in the open interest during the week outpacing the addition of about 10.7 lakh shares for in-the-money 4600 calls.      The first chart more or less gives the rationale behind the movement in the options open interest last week. The Nifty not only took another support at the March'09 trendline but also remained capped by the trendline emerging from its June'09 high. However as can be seen, the range for the movement seems narrowing and the coming week could finally take the market out of this pendulum behaviour.  TROUBLESOME VIX  The Dow meanwhile had lost about 2% for the week as on Thursday and at the time of this article going to press it was struggling to trade above 9350. While the Dow has fallen below a crucial 9425 (38.2% retracement of the bear market fall), the support at 9100 could keep hope of a rebound alive for the US index. However, as can be seen from the second chart, on the higher side a clear rise past 9500-9600 would be essential for a healthy revival in the sentiment.      One development that could obstruct Dow's move in this range is the gains in the Chicago Board Options Exchange volatility index (CBOE VIX) last week. As the third chart shows, with the gains, the VIX now is trading above its 50 DMA (Day Moving  Average) as well as a trendline extending from Jan '09. In addition, its 20 DMA is very close from making a positive cross over with 50 DMA. Such a cross over can give further impetus to the VIX and can cause Dow to even give away the support near 9100.  FRESH TRADE  Last week we suggested initiating a long position at 4650 with a stop below 4560 and benefit from a possible rise towards 4800. While the resistance at 4730 kept the call away from its target, the Nifty more than once bounced off from its 20 DMA (currently at 4567).      In the light of the tighter range that could decide the index's fate (see Nifty), we suggest to hold on to this long position and maintain a strict stop below 4560. Profits can be booked in the range of 4730-4750.      devangi.joshi@timesgroup.com