In my very first contribution to the Derivatives Diary in the edition dated 30th March (Gloom, Doom..BOOM?), we started our first attempt to understand if the Nifty's gains since early March were a mere bull market rally or a bottom of the latest bear run.
The Nifty has not only risen by an astonishing 66% since then, but is now standing at the verge of a technical bull market entry.
As can be seen from the first chart and pointed out in the previous week, 4600-4650 would turn out to be the crucial resistance range. A close above this mark would mean that the index has managed to surpass the last high of the bear market correction.
The Nifty continued its rise during the week. It took a strong support at its weekly open of 4450 and managed to surpass the crucial resistance level of 4600 albeit briefly. Though the underlying momentum is unquestionable, it may take the index more to close above 4650 and technically define the start of a bull run.
The final constraint may well be a cross over between the 100 Day Moving Average (DMA) and 200 DMA. The last such cross over took place in December 2004, which then led to the bull cycle that lasted for nearly four years. Since then, all market corrections were supported by the 200 DMA and the 100 DMA always kept floating above the 200 DMA until May 2008. Although the gap between these two pointers is shrinking, a cross over of 100 DMA (3227) above 200 DMA (3370) could be the last indicator of an entry into the bull market.
With the continuous out-performance of Nifty over its US counterpart Dow Jones Industrial Average (DJIA), the possibility of decoupling is getting stronger by the day. However, the Dow finally seems to be following the footsteps of its younger brother with a weekly gain of 3% at the time of this article going to the press. What is testing the strength of the Dow is its 200 DMA (at 8723 as on Thursday). As can be seen from the second chart, the Dow has managed to close above this mark on Thursday. Besides the 200 DMA, the Dow will have to move past the lower trendline of a downward channel that existed from September 2007 to September 2008. On Friday, the US index opened with a big gain on the back of less pessimistic payroll data for the month of April. However, the next crucial zone of resistance now lies in 9000-9100.
Cautiousness stems from the behaviour of the Chicago Board Options Exchange (CBOE) volatility index (VIX). The VIX has largely reflected the volatility in global equity markets with efficiency. While it moved rampantly from early September, following a plunge in the markets, it has been on a declining course since March this year. However, it is moving in a wedge like pattern and hasn't still fallen out of it, clearing a path for a confident up move. Also, a possible breach on the upside of the wedge bears the risk of some correction in the Dow.
FRESH TRADE
Last week, we expected the Nifty to move towards 4600 albeit following a retracement towards 4350. Although the Nifty managed to comfortably touch 4600, it sustained its bounce above 4450 and in turn our call was not initiated. In the last two trading sessions of the week, the open interest in Nifty June futures has seen an upswing of nearly 16 lakh shares and the futures have closed at a premium to the spot. On the options front, the 4500 calls continue to hold the maximum open interest amid a decline of more than 4 lakh shares since Thursday. On the other hand, the 4800 calls have added more than 3.5 lakh shares.
The 4700 puts have added more than 4 lakh shares, while the 4500 puts have maintained significant open interest.
To sum up, the market may see a consolidation in the 4650-4450 range before the next big move emerges, which is more likely to be on the upside. However, a cross over of 100 DMA over 200 DMA is required for the confirmation of a strong uptrend.
Till such a development takes place, one can ride the momentum by going long in 4500-4450 range with a strict stop loss below 4350 and a target of 4700.
The Nifty has not only risen by an astonishing 66% since then, but is now standing at the verge of a technical bull market entry.
As can be seen from the first chart and pointed out in the previous week, 4600-4650 would turn out to be the crucial resistance range. A close above this mark would mean that the index has managed to surpass the last high of the bear market correction.
The Nifty continued its rise during the week. It took a strong support at its weekly open of 4450 and managed to surpass the crucial resistance level of 4600 albeit briefly. Though the underlying momentum is unquestionable, it may take the index more to close above 4650 and technically define the start of a bull run.
The final constraint may well be a cross over between the 100 Day Moving Average (DMA) and 200 DMA. The last such cross over took place in December 2004, which then led to the bull cycle that lasted for nearly four years. Since then, all market corrections were supported by the 200 DMA and the 100 DMA always kept floating above the 200 DMA until May 2008. Although the gap between these two pointers is shrinking, a cross over of 100 DMA (3227) above 200 DMA (3370) could be the last indicator of an entry into the bull market.
With the continuous out-performance of Nifty over its US counterpart Dow Jones Industrial Average (DJIA), the possibility of decoupling is getting stronger by the day. However, the Dow finally seems to be following the footsteps of its younger brother with a weekly gain of 3% at the time of this article going to the press. What is testing the strength of the Dow is its 200 DMA (at 8723 as on Thursday). As can be seen from the second chart, the Dow has managed to close above this mark on Thursday. Besides the 200 DMA, the Dow will have to move past the lower trendline of a downward channel that existed from September 2007 to September 2008. On Friday, the US index opened with a big gain on the back of less pessimistic payroll data for the month of April. However, the next crucial zone of resistance now lies in 9000-9100.
Cautiousness stems from the behaviour of the Chicago Board Options Exchange (CBOE) volatility index (VIX). The VIX has largely reflected the volatility in global equity markets with efficiency. While it moved rampantly from early September, following a plunge in the markets, it has been on a declining course since March this year. However, it is moving in a wedge like pattern and hasn't still fallen out of it, clearing a path for a confident up move. Also, a possible breach on the upside of the wedge bears the risk of some correction in the Dow.
FRESH TRADE
Last week, we expected the Nifty to move towards 4600 albeit following a retracement towards 4350. Although the Nifty managed to comfortably touch 4600, it sustained its bounce above 4450 and in turn our call was not initiated. In the last two trading sessions of the week, the open interest in Nifty June futures has seen an upswing of nearly 16 lakh shares and the futures have closed at a premium to the spot. On the options front, the 4500 calls continue to hold the maximum open interest amid a decline of more than 4 lakh shares since Thursday. On the other hand, the 4800 calls have added more than 3.5 lakh shares.
The 4700 puts have added more than 4 lakh shares, while the 4500 puts have maintained significant open interest.
To sum up, the market may see a consolidation in the 4650-4450 range before the next big move emerges, which is more likely to be on the upside. However, a cross over of 100 DMA over 200 DMA is required for the confirmation of a strong uptrend.
Till such a development takes place, one can ride the momentum by going long in 4500-4450 range with a strict stop loss below 4350 and a target of 4700.
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