As the country readied itself for the election results last week, the equity market followed the action. While the Nifty swung on both the sides,
it managed to close the week with a decent gain of 1.5%. Though the index failed to move past a resistance of 3715, it still showed a strong resilience against a fall below 3530. The volatility in the market as reflected by the Nifty Volatility Index (VIX) rose to the late November 2008 levels.
However, the humungous rise in the open interest of Nifty options on Friday shows that traders were getting ready to take the election result in their stride even as the speculations over the structure of the expected coalition government mounted.
While Nifty oscillated in a range of 175 points, it closed above its 50 week moving average (WMA) for a third consecutive week. Besides, the cross over between its 10 WMA and 20WMA seems widening out. This is unlike May 2008 when the index managed to close above the crucial indicator of 50 WMA but the 10 WMA failed to rise past 20 WMA and the gains were given away in the subsequent week. In contrast, the 10 WMA seems moving closer to 50 WMA, citing a buoyant short-term momentum. Last time the cross over between these two moving averages took place in October 2004, after which we saw the mother of all bull runs.
While the Nifty portrays a possibility of a massive upside, its international counter part DowDJIA) trading at 8290 is down 2% for the week at the time of this article going to press. Like its Indian peer, the moving averages for the index show a firm grounding. The downside seems strongly floored by the 50 and 100 Day Moving Averages (DMA) at 7933 and 7850 respectively. A cross over between these moving averages can cause the Dow show a bolstering move towards 8750.
While Indian VIX is now widely followed by the traders, in the past it has failed to optimally reflect the market sentiment. A more efficient indicator of the volatility, CBOE (Chicago Board Options Exchange) VIX, which rose as high as 89 during the latest bear run, has not managed to breach below its seven month trading range. However, as can be seen from the chart, it continues to find support from a trend line from its February 2009 lows. Once the VIX manages to give away this support, the rally in markets is likely to experience a consistent escalation.
Meanwhile, an apparent high volatility in the domestic market has trapped our cherished friend, ET Intelligence Group’s Smart Money Ratio (SMR) in an arrest in its ten-month trading range. The indicator has shown a bounce from a trend line from the point when it first breached out in the buy territory during early March. The SMR may have to breach below this trend line for a confident bullish trend.
Fresh Trade :
While the Nifty closed in a negative territory three times last week, the May future almost always closed with a premium over the underlying index. A study of the open interest buildup in the near month options reveals that the traders are embracing themselves for a possible big move on the upside. There has been an average buildup of 22% in the May calls of 3600- 3300 range on Friday. Likewise, even as 3800 put continues to hold the maximum open interest, there has been an addition of 35% in 4000 puts.
One could thus go long on Nifty once the barrier of 3720 is breached tidily if the SMR simultaneously manages to breach below the shown trend line. The initial target for the move will remain in 3800-3850 range, while an eminent control of bulls from then on can take it towards 4050-4100 levels. The stop loss for the trade should be kept as a close below 3530 or a rise of SMR past its 11th May high of 48.80 Jones Industrial Average (
However, the humungous rise in the open interest of Nifty options on Friday shows that traders were getting ready to take the election result in their stride even as the speculations over the structure of the expected coalition government mounted.
While Nifty oscillated in a range of 175 points, it closed above its 50 week moving average (WMA) for a third consecutive week. Besides, the cross over between its 10 WMA and 20WMA seems widening out. This is unlike May 2008 when the index managed to close above the crucial indicator of 50 WMA but the 10 WMA failed to rise past 20 WMA and the gains were given away in the subsequent week. In contrast, the 10 WMA seems moving closer to 50 WMA, citing a buoyant short-term momentum. Last time the cross over between these two moving averages took place in October 2004, after which we saw the mother of all bull runs.
While the Nifty portrays a possibility of a massive upside, its international counter part DowDJIA) trading at 8290 is down 2% for the week at the time of this article going to press. Like its Indian peer, the moving averages for the index show a firm grounding. The downside seems strongly floored by the 50 and 100 Day Moving Averages (DMA) at 7933 and 7850 respectively. A cross over between these moving averages can cause the Dow show a bolstering move towards 8750.
While Indian VIX is now widely followed by the traders, in the past it has failed to optimally reflect the market sentiment. A more efficient indicator of the volatility, CBOE (Chicago Board Options Exchange) VIX, which rose as high as 89 during the latest bear run, has not managed to breach below its seven month trading range. However, as can be seen from the chart, it continues to find support from a trend line from its February 2009 lows. Once the VIX manages to give away this support, the rally in markets is likely to experience a consistent escalation.
Meanwhile, an apparent high volatility in the domestic market has trapped our cherished friend, ET Intelligence Group’s Smart Money Ratio (SMR) in an arrest in its ten-month trading range. The indicator has shown a bounce from a trend line from the point when it first breached out in the buy territory during early March. The SMR may have to breach below this trend line for a confident bullish trend.
Fresh Trade :
While the Nifty closed in a negative territory three times last week, the May future almost always closed with a premium over the underlying index. A study of the open interest buildup in the near month options reveals that the traders are embracing themselves for a possible big move on the upside. There has been an average buildup of 22% in the May calls of 3600- 3300 range on Friday. Likewise, even as 3800 put continues to hold the maximum open interest, there has been an addition of 35% in 4000 puts.
One could thus go long on Nifty once the barrier of 3720 is breached tidily if the SMR simultaneously manages to breach below the shown trend line. The initial target for the move will remain in 3800-3850 range, while an eminent control of bulls from then on can take it towards 4050-4100 levels. The stop loss for the trade should be kept as a close below 3530 or a rise of SMR past its 11th May high of 48.80 Jones Industrial Average (
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