Breakout may swing both ways

The benchmark indices in Asia, Europe and the US closed in a Doji pattern last week, signifying indecision among market players. The Nifty closed at 5,117.30 as against its last week’s close of 5,108. The BSE Sensex closed at 17,119 compared to 17,101 a week ago. A Doji pattern is often found at the bottom and top of a trendline and is considered as a sign of possible reversal of direction. In a Doji pattern, the market explores its options either way.

After a long uptrend, the indecision manifest in the formation of the Doji pattern could be viewed as a time to exit position or at least scale back. The trading volume of foreign institutional investors (FIIs) on the derivatives segment indicates profit booking at higher levels and short covering at lower levels. FIIs’ open interest in the index and stocks futures remained unchanged in the week despite more sell-side trades.

The Nifty got support at 5,080 on four consecutive days in the week and managed to close above 5,100 after touching a 19-month high of 5,182.55 on Friday. The Nifty December futures, which traded at a premium of 5-10 points almost entire the week, closed at a discount of 6 points to the spot with open interest unchanged. This is a clear indication of narrow-range movement and indecisiveness. So, holding the 5,080 level is important and if the Nifty closes below the 5,050 level, we may see a sharp correction next week.

The derivative participants and FIIs seem to have covered short positions in the Nifty December futures on Friday as it closed at a discount, but open interest declined by 277,800 shares despite 21 per cent rise in volumes. FIIs trading on the derivatives segment on Friday shows decline in open interest in the index futures through buy-side trades. It indicates short covering at lower levels. FIIs seem to have build up long positions in stock futures as its OI in stocks futures increased through buy-side trades.

The likely to move out of trading range According to latest data from global fund tracker EPFR Global, emerging market equity funds received $2.3 billion in the week ended December 9, bringing 2009 inflows to $75.4 billion. Emerging market funds are heading for record annual inflows this year. The previous record was $54 billion in 2007. FIIs’ net inflow in the Indian secondary market (BSE+NSE) is pegged at Rs 22,795 crore against a net outflow of Rs 101,804 crore in 2008.