Wednesday, November 4, 2009

There is little room for further correction

The Nifty November futures were trading at a discount of 28 points to the spot in intra-day trade as long traders preferred to hold their positions while the index fell sharply to below-4,600 levels. Trading data in Nifty futures suggested the bulls were not willing to cover their long positions as average trade in the November futures was at 4,653 compared with the spot closing of 4,564.

Historically, whenever Nifty futures has traded at a discount of above 25 points to the spot, the index has recovered sharply. So, even as the Nifty corrected by over 3 per cent today, the trading pattern in the futures & options segment suggested the index might recoup yesterday’s losses and start trading above 4,600 tomorrow during intra-day trade.

Interestingly, Nifty futures were settled at 4,559 during the close of trade and added 1.98 million shares in open interest compared to an intra-day build-up of 4.17 million shares, indicating a long build-up. Bloomberg data suggest that almost 20 per cent volume, mostly buy-side trades, changed hands in the last 30 minutes of trade, indicating long build-up by bulls and short-covering by bears.

Options traders bought 4,800-5,000 strike calls on expectation of a modest recovery in the Nifty in the near future. Even if the Nifty recovers by 150-200 points from the current level this week, these calls can fetch a handsome premium. The 4,600-4,700 call witnessed profit-booking as it shed 0.22 million shares in open interest through sell-side trades. The support for the Nifty is seen at 4,500-4,600 levels.

According to technical analyst Gautam Shah of JM Finance, markets are deeply oversold on most technical parameters with little room to correct further. Technically, the fall has helped in doing a perfect 38.2 per cent retracement of the rally from 13,200-17,500. The current move is a shakeout and could be followed by a similar recovery.

No comments:

Post a Comment