NIFTY:Correction Blues

DEVANGI JOSHI ET INTELLIGENCE GROUP  LASTweek the Nifty could not count on the critical trendline that supported all the intermediate correction since March'09. The Nifty's US counterpart Dow Jones Industrial Average (DJIA) showed a flipflop movement throughout the week, after its high was resisted by a trendline which joined all its highs since April'09 since start of the week. On the other hand the Nifty sustained its decline from the start of the week. The decline in Open interest of the October future was in line with the declining Nifty while the volume of the future strolled up and down for the four trading sessions of the week. This indicated that while the fall of the index started with liquidation pressure, the sustained decline in the open interest spread the weakness in the market.  CONTROL SHIFT : With a decline of 3% during the week, the shift in open interest of the October options also indicated that the traders shifted their gaze  towards the 5100-5000 as the probable trading range. This is validated by the change of strike price, which held the highest open interest on the call side. Since Wednesday October 5100 calls held the maximum open interest while for previous seven sessions 5300 strike maintained the highest open interest for call side. On the put side while October 4900 strike maintained its position of the biggest possessor of the open interest, October 5100 calls lost nearly 21 lakh shares during the week.      Another interesting observation is the average change in the open interest of the 5100-5000 options of the October series during the week. Collectively 5100-5000 calls added about 32 lakh shares in the open interest in last four trading sessions, puts for these strikes lost about 33 lakh shares during the period. This development indicates that the corresponding range could be a difficult zone to breach for the Nifty.  PCR TREND: As the puts were unwound, the October Put Call Ratio (PCR) declined from 1.72 at the end of the week before last to 1.27 at the end of the last week. Since the start of the October series during the sharp market declines, the October PCR has ranged in 1.27-1.31 range. As can be seen from the adjoining table for previous two instances the market experienced a rebound as the October PCR bounced from this range. As on Friday, October PCR has again moved to 1.27 and any recovery from this level could bring in some resilience for the Nifty. Strength of March'09 trendline However the breach of March'09 is a crucial event that could keep the Nifty away from any rebound. As can be seen from the first chart, along with this breach, the Nifty has closed not only below the short-term indicators like 5 and 10 Day Moving Averages (DMA) but also substantially below the 20 DMA, first time in two months. As evident the 20 DMA (at 5040) now coincides with the March'09 trendline making it a tough resistance. On the downside initial support is expected to come from lows of first two weeks of Ocotber'09 near 4940. A breach of this level however would indicate that the Nifty is eyeing the support of a trendline joining the intermediate highs since August'09. This trendline coincides with the 50 DMA (4825), a crucial medium term indicator.  NIFTY WEEKLY: The Nifty weekly chart also indicates that 5040 will be a tough resistance to crack. This is because the Nifty closed below its 5 Week Moving Average (WMA) for a second time in three weeks. However the gap between the 5 WMA (at 5025) and the Nifty is more than double than at the end of the first week of October when it closed below the 5 WMA first time since mid-August.  CONFUSED DOW: As for Dow its Thursday's gain of 132 points more or less compensated the decline it experienced in the previous two sessions. With this recovery the Doe remained above all its near term moving averages. However, for its gains to reappear the US index will have to move past the trendline joining highs since May'09. The possibility of such a development will remain alive till the time the Chicago Board Options Exchange volatility index (CBOE VIX), a gauge of the market volatility remains capped by a trendline extending from early 2007. As can be seen from the third chart, since last week the VIX has fallen below this trendline after it failed to move above its 100 DMA at the start of October.      Fresh Trade: Last week we suggested going long in 5080-5040 range given the strong support Nifty could have found near 5000. While the Nifty moved towards 5200 during the start of the week, the subsequent decline caused the call to stop out. This week, we suggest going short in 5040-5070 range for an initial target of 4900 with stop above 5120.      devangi.joshi@tiesgroup.com