NOT OUT OF THE WOODS

THE Nifty while showed an over 3% rebound from its lows and closed above the crucial 4800 mark last week, the gain looked more like a shortcovering action. The Nifty's US counterpart, the Dow Jones Industrial Average (DJIA) also showed a rebound above 10,100 after closing below 10,000 for once during the week. However, the negative inclination of the US index may sustain given the resistance it is likely to face in 10200-10350 range. 

OPTIONS DEVELOPMENT 
Despite a 2% gain on Thursday, the market tone remained weak, as reflected by the progress in open interest and volume of the February future. For most days of the week, both these indicators moved in opposite direction of that of the Nifty future. For two days when the February future ended in a positive territory, both open interest and volume demonstrated an average decline of 5.5% and 23%, respectively. Moreover, open interest of the February future increased only on Wednesday when the February future closed with a discount of 6 points to the Nifty, reflecting fresh short positions. 
SUPPORT OF 4700 
Last week, the Nifty turnaround from a brief decline below 4700, highlights the support at this level. Likewise, the gain in the open interest of February 4700 puts also indicates a rise in firmness at the level. The strike acquired the highest open interest of nearly 14 lakh shares during the week, more than half of which occurred on the last trading session itself. Consequently, 4700 became the strike holding the maximum open interest on the put side unlike last week when the February 4800 puts maintained the highest open interest. While the pace of call writing declined, puts of 4600-4800 strikes added an average of 10 lakh shares in the open interest during the week. 
RESISTANCE OF 4950 
Even if the Nifty has conquered the near-term resistance of its 5 and 10-day moving averages (currently at 4779 and 4812, respectively), the real test of the index's rally would be near its 20 DMA (currently at 4942). As can be from the first chart, the 20 DMA maintains a negative crossover with both the 50 and 100 DMA and coincides with the Nifty's high in the first week of February. 
BATTLE ZONE FOR DOW 
While Dow has displayed a parallel turnaround after closing below 10000 for once till Thursday, the index is likely to find it tough to move past 10200-10350. This is because unlike the Nifty, the first crucial resistance the Dow will come across is its 100 DMA, an important medium-term indicator (currently at 10189). Further, it could experience a sustained liquidation pressure near 10315-10330, which encloses the resistance of the trendline emerging from its August 2009 low as well as 50% retracement level of its decline in the bear market of 2008. 
    This liquidation, however, will have to correspond with a rise in the Chicago Board of Options Exchange Volatility Index (CBOE VIX) past its 200 DMA. The index, whose decline from March 2009 accompanied the market recovery, is an efficient benchmark for volatility. As can be seen from the third chart, the index is on a rising streak since mid-January 2010. After gaining more than 50% since then till the beginning of last week, the index has failed to breach the resistance of its 200 DMA. While a positive crossover between 20 and 50 DMA is in place, the index's defiance of the mentioned long-term indicator would validate the Dow's return to a downward trail. 
FRESH TRADE 
Last week we suggested booking part profit for the shorts initiated in the first week of February, near 4650 and initiate fresh sell near 4800-4850. We suggested keeping a combined stop for these shorts as a close above 4950. Because of the Nifty's rebound from just about 4675 while the part profit could have been missed, we suggest holding on these shorts with the mentioned stop. 
    devangi.joshi@timesgroup.com