Momentum points to a bullish trend

The Nifty at the 5,300 level is finding some resistance from the 61.8 per cent Fibonacci retracement of its previous decline of 5,630-4,770 levels (see chart). However, within this narrow range resistance, what is visible is that the Nifty is not willing to give even a minor reaction and continues to exhibit higher highs and higher lows. This indicates the underlying momentum continues to stay positive on the Nifty. Short-term support for the Nifty now stands at 5,180 levels and 5,200 PE (put option) has outstanding open interest (OI) of over 6 million shares. As long as the Nifty holds above this level, there is a decent possibility that in the short term, it can touch levels closer towards 5,380-5,450 levels. A breach below 5,180 will suggest the Nifty might go back and test 4,980 levels. Support from an up-trending trend line drawn connecting pivotal lows is also placed at 5,230 levels. Thus, going forward, 5,180-5,230 is the key support one needs to watch for. As long as the Nifty stays above it, the overall outlook will remain positive.

With last month’s closing, Nifty has formed a bullish engulfing pattern on the monthly charts. Moreover, momentum indicators like RSI (relative strength index) and MACD (moving average convergence divergence) are positively poised across all time frames, viz. monthly, weekly and daily. All through the fall since February 2012, the RSI was being capped at 60, the upper end of its bearish range. For the first time since February, the RSI has crossed above 60, a sign of strength. Thus, this combination of positive price structure and momentum support our bullish stance.

The 78.6 per cent Fibonacci retracement (5,630-4,770) and the falling trend-line from the high of November 2010 is placed at 5,460, along with 5,400 CE (call option) OI of 6.8 million shares, which remains our overall target for the current upmove.

On the daily charts, the short-term moving average (20 DMA) has given a cross over medium-term average (50 DMA) as well as long-term moving average, which indicates that the underlying sentiment of the index is bullish. In the immediate short term, traders can hold long positions with a stop-loss, of a 20-weekly moving average of 5,183.

After seeing aggressive rolls, in the first five days of trade, the Nifty Futures has added OI to the tune of 17 per cent, with the premium in the Nifty futures maintained at 17-20 points, well above the three-month average. This clearly implies aggressive fresh longs being added, suggesting the underlying sentiment is positive and the Nifty is heading towards the 5,380-5,450 mark in the short term.

The India VIX behaviour pattern also suggests the undertone is bullish. India VIX April-May period had retested an intermediate high of 29.12. From the first week of June, it started to decline, and has now broken below the crucial support level of 20 from where it had given a breakout, implying bulls gaining strength. In the first week of July, it continued to decline till 18.35-18.50 levels. And, if it continues to remain below 20 and moves towards 14-17 range, it would imply that in the medium term, the Nifty can surprise by moving till 5,550-5,600.

FIIs, over the last one week, have been buyers in both cash (Rs 4,750 crore) and F&O. Right from the start of the contract, they have been buyers to the tune of Rs 2,200 crore in Index Futures, implying FII action also supporting our view of this market — buy on dips till the Nifty holds above 5,180, with a target of 5,380-5,450.

The author is national head (derivatives), Aditya Birla Money