Index OutlookSensex (8701.1)It was a week when all one could do was, watch awe-struck, as stock prices fell in to a bottomless pit. The Sensex effortlessly sliced though one support level after another despite efforts by the troika of the Finance Ministry, SEBI and the RBI to stem the decline. The 100 basis points cut in repo rate, meltdown in commodity prices and lower WPI numbers were shrugged aside as Sensex tumbled 1274 points lower.
There is still a week to go before October ends and FIIs have already pulled out close to $3 billion. Tally for outflows in 2008 has crossed $12 billion. Turnover was brisk, mainly in the derivative segment. The expiry of the October contracts in the derivative segment is expected to pass quite smoothly since the open interest is quite low around Rs 50,000 crore. Low Nifty put call ratio indicates that short positions are being squared at lower levels.
The bear onslaught on Friday dragged the Sensex below 9700 to an intra-week low at 8566. We have stressed the importance of 9700 often in our previous columns. It occurs at 61.8 per cent retracement of the structural up-move from 2001. The structural trend in the Indian markets stays up as long as this level holds.
However, these are long-term support levels. We will wait for two more weekly closes below 9700 to ascertain that Friday’s move was not a false break-out. Conversely, a weekly close above 9700 will make the medium-term view positive again. The support at 8800 (June 2006 trough), indicated in our long-term outlook review was also penetrated on Friday. Next support on the long-term chart is the October 2005 low at 7700.
As per E-wave counts the first target for the C wave from 21206 peak is at 10207. But the continuation of the decline last week has made it apparent that this wave could unfurl to the next target - that is 6887. Minor counts of the down-move from 15579-peak too indicate that if the Sensex declines below 8000, the next halt would be in the zone between 6200 and 6800.
For the week ahead, it needs to be remembered that Sensex is hovering at a key long-term support and a rebound is possible anytime. Supports for the week would be at 8566, 8152 and then 7582. Resistances would be at 9900 and then 10750. A close above the second resistance is needed to make the short term view positive.
Nifty (2584)Nifty too has penetrated many important long-term supports on Friday. It declined below 2950 as well as the June 2006 trough at 2595. Since the first target of the third wave from the 6357 peak at 3070 has already been penetrated emphatically, it is time to take a look at the next target that is 2093. However, a recovery from current levels that results in a weekly close above 3070 will mitigate the bearish medium-term view.
For the short-term, Nifty can decline to 2525 or 2276. Resistances for the week are at 2972 and then 3254. Close above the second resistance will make the near-term view positive. Failure to move past the first resistance will be a cue for traders to initiate fresh short positions.
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Nifty future in oversold zoneDespite a positive opening for the markets, bears had the last laugh as markets swooned under selling pressure to touch its three-year lows. Predictably, even the Nifty future breached its all-important technical support levels during the week. Both the Nifty October and November futures closed with a huge discount to the spot, which suggests that despite the steep fall, a chunk of the short positions may have been rolled over to November month. So far, about 40 per cent of Nifty positions have been rolled over to November series.
Follow-upWe had presented two strategies on Nifty last week. i) Going long on Nifty future with adjustable stop-losses and ii) Buying December 3500 call. While the first strategy may have provided some profit opportunities, the second strategy would have resulted in sharp value erosion. We suggest traders switch from the December 3500 call to the 3000 strike, which may earn decent profits when the market witnesses a relief rally.
Outlook We had indicated a support level of 2600 for Nifty futures last week in this column. Now that it has breached the 2600 level, its next support level appears at 1890, which is significantly lower from the current levels. While any steep fall from the current level can take the Nifty lower to its support, there is a minor support at 2300 level.
Alternately, if Nifty reverses from its current levels, it will face resistance around 3050 level.
Any breach of this level, can take Nifty Future to 3350, 3650 and even to 3850 levels. However, we feel the real pivot point for Nifty future is 4350 levels. Only on a move above that level can one turn bullish. The market, however, has been in the oversold zone for quite some time.
RecommendationRetail traders are better off staying away from markets given the sharp intra-day swings that can wipe away gains in no time. However, traders with a high risk appetite can consider a straddle strategy. This can be set by buying Nifty November 2750-call and put.
Traders can hold the position till the expiry of November derivative contracts. Nifty Nov 2750 call closed on Friday at 179.10 and the put ended at Rs 367.25. Straddles are a good strategy to use when a trader believes that the underlying’s price will move significantly, but is unsure about its direction. But for the option spread to move in the money, the underlying asset price has to make a decisive move in either direction. This means, if the price remains stuck in a narrow range, it may not be profitable.
The maximum loss would be limited to the premium paid, whereas the profit can be unlimited if the underlying makes the desired movement.
FIIs trend
The cumulative FII positions as a percentage of total gross market position on the derivative segment as on October 23 increased to 38.72 from October 18 level of 37.83 per cent. This indicates that retail and domestic players have reduced their activity in the market.
Foreign institutional investors have hiked their positions in index futures, but have considerably reduced their exposure to stock futures.
They now hold index futures worth Rs 11,847.25 crore (Rs 11,725.08 crore) and stock futures worth Rs 11,909.55 crore (Rs 14,095.31 crore). Their holding on index options declined marginally to Rs 17,018.53 crore (Rs 17,988.85 crore), according to latest NSE data.
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