F&O OUTLOOK: Nifty may correct further next week

The Nifty closed in the red on Friday due to profit-booking at higher levels. For the last nine trading sessions, the Nifty has been making lower lows and lower highs, which is a bearish indication. According to a technical analyst at HDFC Securities, unless the index stops making new intra-day lows, the correction will continue.

Earlier, we had indicated that a rising wedge is being formed on benchmark indices which is similar to the January 2008 pattern. In both instances, the wedge was formed over several weeks and markets collapsed thereafter. The rising wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows.

On the basis of the rising wedge theory, we had indicated that the Nifty could go up to 5,150 and if the index moved out of the trendline, the market would correct sharply. The Nifty made a high of 5,181 and started correcting. It has broken below the confirmation level of 4,700. The Nifty has fallen below 50-DMA (daily moving average) levels, and according to the rising wedge theory, may correct further and hit the 200-DMA level of 3,922.

Options traders expect the Nifty to correct further and trade around 4,600 levels on Tuesday. Traders expected the index to go below 4,600 levels next week as open interest in 4,600 call options rose more than 100 per cent through sell-side trades. The strong resistance is seen at 4,700-4,900 levels as 4,700-4,900 calls together added 4 million shares in open interest through sell-side trades.

The Nifty November futures have started trading at a discount to the spot as traders have started unwinding long positions. Futures have added 425,050 shares in open interest despite a trading volume of 34.32 million shares.

Bloomberg data show that bulls booked profit when the index was trading above 4,850 while bears covered their short positions when the index was trading around 4,700-4,720.

On Friday, foreign institutional investors covered their short positions in index and stock futures by taking advantage of the 550-point swing in the market. However, this will have no positive effect on market as the US and European markets closed in the red on Friday. Our market is closed on Monday on account of Guru Nanak Jayanti.