Volume-based recovery to take Nifty to 5,311

The Nifty August futures broke below lower-end support at 5,185 in the morning session, on weak global cues, and moved further down to 5,114 on selling of long positions by traders.

The revival was pretty fast, as index first rolled back into support at 5,185, and then rallied above 5,200 to settle at 5,220, on short-covering from day traders.

The volume-based recovery has set the stage for a modest rally into 5,300 next week, but downside pain is likely to be significant around 4,850.

Now, the market has achieved a short-term range of 5,200-5,700, so we may face a lot of negative news from external sector, thus driving the market further down into 5,050/4,825/4,775/4,675, says Moses Harding, head, Global Markets Group, IndusInd Bank.

The one strong bullish factor is the rollout of QE3, which would provide relief rally in global bourses. The momentum to this support from the Federal Reserve will be strong if the RBI leaves the rates unchanged in mid-term review. These two factors will bring the bulls back into the street. For now, watch 5,200-5,400, with test/break either-way not expected to sustain.

The August futures settled at par to spot, and despite a trading volume of 34.69 million shares in open interest (OI), declined marginally by 443,850 shares. The trade summary matrix (TSM) suggests change of hands, indicating entry of new other time-frame traders.

The participants had absorbed the selling pressure, as seen in the TSM chart, between the day’s low of 5,114 and close at 5,220. This volume-based recovery is expected to take the futures to 5,311 on Monday. If the global market remains weak, the volume-based support is expected to come around 5,091.

The key stocks’ futures that dragged the index down to around 5,114 are expected to see some recovery in a day or two. Infosys Technology may see volume-based recovery around 2,660, and support around 2,522. Reliance Industries is likely to go up by 808, TCS by 1,078, ICICI Bank by 982 and State Bank by 2,285.

Sensing the weakness, participants bought 5,000-5,100-strike put options to protect long positions. The market undercurrent remained weak, as the 5,100-5,200-strike call options together added 5.16 million shares in OI through sell-side trades.