Bottom To Be Formed Early In The Week

It was difficult to make out where the market wanted to head. At the start, the gap created over the weekend ensured that we would see a gap up. Ideally, that should have carried ahead nicely and taken markets higher. When prices started trading above the gap are of Aug. 26, the feeling was intensified. But no sooner did it attempt to continue higher than selling emerged and trimmed the gains of the earlier day. As a result, the market ended a bit uncertainly, although it finished in the green. Chart 1 shows the intra-week movement of the Nifty. The gains through the week have created a bullish candle for the week for the Nifty as well as the Bank Nifty.

While the prior weekend had created an upside gap possibility, this weekend is showing the opposite—a downside gap likelihood. If one takes a look at the SGX Nifty as it trades six days, we see a different picture of a bearish candle! If the market now opens lower and trades lower, then it will have to deal with the wide gap created on last Monday, with a gap low at 16,900. Such rapid swings in the short-term trends create tremendous confusion and traders have a very tough time winning by design. In the last week, call shorts probably booked one of the highest quantum of losses.

Chastened perhaps, by the recent experiences of option shorters getting a tremendous whack (last couple of weeks, in fact), it seems like option traders have taken a more balanced view and have created positions on both sides of current levels. The PCR reads at 0.77/0.85 for the two indices and that is neutral territory. The OI at the current levels is about the same and change of OI for both calls and puts too are similar. Situation is similar in the Bank Nifty as well. So, it seems like traders are on a defensive positioning and want to wait for market cues to shift their balance in the next week. Option players are therefore unlikely to get pushed into any panicked situation even if there are gaps.

Now, next to the important levels for the two indices that we need to watch for.  Since the last downward foray had met with some consistent demand around 16,800-16,850 area and the gap support is present at 16,900 area, we can expect that zone to be protected ahead too. On the higher side, the 17,400 has been a resistance bugbear for the Nifty for long and, hence, that too will be tough to take on without additional positive triggers emerging in the week ahead. These are shown on Chart 2. Since the prices have already hit the resistance level in the last week and are seemingly in a retreat, it would seem logical to consider that the Nifty may reach or attempt a test of the recent support zones as mentioned above.

All through the last many months I have steadfastly maintained that the longer-term trend is not disturbed for the markets. Those that fear every turn in the markets (after a rally) should have greater faith in the robustness of our markets. Call it decoupling, call it new money inflow, call it change in India fundamentals—it doesn’t matter, because it is a different reason for every person. Collectively, there is no willingness to abandon any built-up positions. FPIs sold but the rest of us were more than a match for them. Now they are buying and that is shoring up the trend. If they sell again, the cycle of domestic and retail buying will surely repeat. So, I wager that this would continue even further.