Wednesday, July 27, 2011

EOD Analysis for 27th July 2011 and Outlook for 28th July 2011

Nifty started on a mild note in the morning but the OI in Nifty futures was pretty high at 26 million levels; with DII settlement day today and weak global cues, the selling pressure began and within no time, the OI in Nifty futures went up to 28 million and both Nifty fell below crucial level of 5532 and Banknifty fell below the 11k mark; [My sincere apologies to all readers for not giving the DII settlement the importance it deserved and potential risks for Nifty on the downside]

Some short covering was seen around 5520 levels and yet again there was a spurt in the Nifty OI futures at almost 30 million. Short covering was seen in financials, capital goods but profit booking on telecom continued. The huge Put Writing seen at 5500 levels were covered last week and the huge Call writing of 5600 CEs were also covered at piecemeal rates by Option Writers.

Banknifty shorts covered to bring it to safe zone of 11050 once but towards the end, Banknifty fell below the 11k mark again before managing a respectable close marginally above 11k. Preferred strategy is 'Sell on Rise' and while the outlook for Banknifty seems good, I would not encourage retail traders to go long on Banknifty before a retest of 10660 and subsequent retracement to 10750+ levels. However, the data for today indicates that there are still many shorts in the system for Banknifty which will be forced to cover or rollover at a higher cost thereby signalling a potential move towards 11250 zone once.

The expiry target still remains in the 5600-5690 zone as a lot of shorts are pending to be covered or rolled over and based on cost of carry, seems like we might see some upside. The options data is still noisy on the last day; 5500 PE is showing an OI of almost 11 million and the 5600 CE is showing an OI of almost 12 million; however this is just the data for today and on a cumulative basis, there has been cumulative Put Writing at higher levels and one could expect manipulations on the upside to render these Puts worthless.

However, expiry day is full of manipulations from institutional funds and it would be ideal to stay out for Thursday and Friday till a clearer picture emerges.

The levels still remain the same
For the Downside: 5408; 5440; 5532
For the Upside: 5580;5608;5655;5690

Retest of 5480-5532 zone was due and we did see some short-covering in that zone; however, it still seems that some weakness persists and as mentioned yesterday, a retest of 5468 is not ruled out in the first week of August. As of now, I would expect 5408 to hold out on EOD basis until 10th August and if it does so, we can safely assume that the medium term trend is up

However, the Bull Story will only be bolstered with 2 consecutive closes above 5740 which will open Nifty for a retest of 5890-5944 levels. Volume requirements are very high for the same

The Bears have inflicted a lot of damage and the current market situation is such that bear corrections will be very fast and furious. The first hope for bears is a close below 5532 on EOD basis and if short covering does not come within the 5480 zone then the carnage can continue all the way to 5408-5440 levels.

There need not be any panic to the extent 5408 manages to stay firm on EOD basis; however, failure to hold 5408 on EOD basis will open Nifty for a retest of 5348; 5225; 5177; 5092 (last point for any possible upside) However, the probability of breaching 5408 on EOD basis is 1% for the next 3 months.

Retail traders should stay out of the market till Friday and take fresh positions on Monday based on global cues and movements of Nifty. Those holding August Puts or Calls on the Long side should square off all positions by Friday latest regardless of Profit or Loss; the movement into August series from Monday will bring down the options premium by and large and that should be the starting point for fresh positions now.

Current corrections in the market are very healthy and are providing opportunities to Buy Nifty and good businesses at attractive valuations. It is also critical to note the Delivery Volumes of stocks that exhibit extreme spurts on the upside or extreme spurts on the downside on regular trading days; some counters are showing signs of circular motion i.e. speculative longs and shorts on alternate basis without any delivery. One should beware of going long or short on such counters before a respectable delivery volume is seen as one can be chopped on either side of such counters.

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