| We discussed the statistical probability of failure of the descending triangle on March 22, when we built the case for going 'long', buying into the 'April accumulation hypothesis'. The Nifty has given a 6.7 per cent profit since then, closing the week at 1,841.
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| Before we look at some more statistical cues to study the Nifty movement in the week ahead, let's look at how the markets behaved over the last fortnight.
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| Most of these heavyweights were suggesting extreme oversold status owing to high values of weighted put-call ratio (WPCR) before the expiration week in March 2004.
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| WPCR, unlike its plain variant PCR, is dormant in nature and works only when there is a huge price decline. The indicator worked well, as Tisco (up 3 per cent) edged up above its strong support and 23 per cent retracement at Rs 400.
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| Tata Motors (up 10 per cent) is currently testing its important resistance near Rs 500 levels; HLL was up 6 per cent and is hovering above its key resistance at Rs 150.
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| Reliance (up 11 per cent) is above both its 20 and 100 DMA closing and has closed the week above an important resistance at Rs 550 levels. ITC is also nearing its Rs 1,100 resistance after forming higher highs this week.
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| Overall, the last two weeks witnessed a broad market up-move taking the Nifty to the higher channel trendline resistances at 1,850-1,860 levels.
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| On the volume front, both spot and F&O witnessed above-average month volumes at Rs 5,000 crore and Rs 12,000 crore, respectively. Nifty futures volume were ruling a per cent more than 2004 average at Rs 4,500 crore.
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| Nifty futures, though, tend to overeact, as they did when the markets were headed lower below 1,700 levels are already suggesting a breakout from the current levels.
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| Though the Nifty futures volumes look better this time than the last few times, Nifty tested the upper trendline, on a monthly average basis, the down volumes are still 8 per cent higher than the up volumes. The figure, however, has reduced by half since the market topped on January 6, 2004.
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| The down volumes were 15 per cent more than the up volumes for the last three trading months in 2004. The volumes it seems still lack the steam to breach the upper trendline decisively. The only positive it seems is a move towards consolidation unlike the bearishness the early part of the year.
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| With a parallel channel becoming conspicuous with every trading day, traders should look for a decisive breakout above the trendline for a sustainable upmove.
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| Moreover, with the marketwide PCR (10 DMA) still hovering at high levels around the 0.45 levels, there is a possibility that the Nifty will attempt to test the upper trendline as the marketwide PCR continues to print lower levels.
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| And with Nifty implied volatility (IV) continuing to remain in the 20-25 per cent band, the level of caution remains low at the current levels.
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| Coincidentally, the Indian market fortnight under study has stark similarities with global markets. The CBOE VIX Volatility Index also moved lower during eight of the past nine trading sessions turning down from a five-month high of 21.58 on March 22.
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| The market's so called 'fear gauge' dropped below 16 on Friday. The drop in the volatility barometer suggests that anxiety levels are easing and there might be more upside in the US markets also.
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| Statistically speaking, a VIX value 10 per cent more than the 10 DMA value of VIX is an extremely oversold scenario and has historically been followed by trading bouncebacks.
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| The trading bounceback was witnessed in the US markets. NASDAQ nudged up above the 2,000 level again. Both RSI and MACD at VIX continue to show bullish divergence.
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| Even, CBOE PCR just like marketwide PCR for Indian markets has reverted back to low levels. The ratio fell to 0.61 last Thursday. This was the second lowest reading for 2004.
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| On the qualitative side, we have the 'emerging market theory' with a section of international investors still looking at 'shorting' volatility expecting stability ahead in the US markets.
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| In simple words the international investors expect the VIX to remain subdued below the 20 per cent mark for rest of the year. This option strategy they wish to execute along with a sizeable emerging market exposure.
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| This is as much as a quarter of the aggregate exposure for some funds and even a third of the total exposure for some investors. Overall, with most of the international markets above their 20 DMA and 100 DMA, the global prices, it seems, should stabilise and hold above current levels for at least the coming week.
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| Barring Hang Sang, most other European and American indices are above their 20 and 100 DMA averages. Shanghai Index and Nikkei still continue to be positive.
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| Nifty should hold on to its gain in the coming week. One can look at a partial profit-booking of the current naked 'long positions' or an alternate option strategy of initiating 'Bull spreads' in index heavyweights barring HLL, which is still below its 100 DMA.
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| Sectorally, one can still remain negative on the CNX IT. As despite an impressive upmove by Nifty, CNX IT continues to languish below the 20 and the 100 DMA values. Both Satyam and Infosys are still below its 20 DMA and hovering around the crucial Rs 5,000 level and Rs 300 levels, respectively.
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| In conclusion, one can expect some resistance and profit booking in the coming week. It seems there is time before we witness any statistical breakout. Till then traders can stay invested in 'index heavyweights' with option bull spreads or with naked futures with tight stop-losses.
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| And in case you still have funds to park, try out the recently launched 'VIX Futures' at CBOE. |
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