Wednesday, August 17, 2011

EOD Analysis for 17th August 2011 and Outlook for 18th August 2011

Nifty opened on a modest note saw some short-covering and an illusory rally immediately after some Puts were written and then the downward spiral continued. The index may not reflect too much of what happened but one of the most important barometers of Nifty i.e. Banknifty made a new low of 2011 and saw August as well as September futures trading at a discount. CNX IT went down quite a while ago and Banknifty going below 10k [also below 9900 at one point of time] is not a healthy sign at all.

On the face of it, there are plenty of shorts in the system and short-covering or roll-overs are bound to take place. The key point to note is that broader markets are taking extremely steep cuts and with Banknifty sinking below 10050 on EOD basis makes it vulnerable to go all the way down to 9700-9750 levels before staging any meaningful comeback. If a lot of contracts are rolled over, for some time we may see the Banknifty futures contracts trading at further discount taking into account cost of carry; even if there is a strong short-covering rally on Nifty and Banknifty, that can still only come to about 5125-5150 levels on Nifty and 10200 levels on Banknifty.

Hawkish RBI is a temporary source of worry for hedge funds due to already prevailing lack of liquidity in the markets and weak global cues. Unless Nifty takes out 5225 on EOD basis, upside is limited. Today was the 3rd consecutive close below 5092 as well. If this is not reversed tomorrow, then Nifty may not go above 5092 on Thursday as well on EOD basis.

3 things hint towards a potential salvage on Nifty for the next 2 weeks

1 - Aggressive Put Writing that may restrict some downside
2 - Pending Short-Covering
3 - Gaps that remain to be filled.

Hedging positions is very critical in such volatile conditions and the first goal of trading should be capital preservation. One should keep an eye on Banknifty, RIL and LnT as these counters will determine the main course of Nifty; today's EOD with a mild note on Nifty and steep cuts on Banknifty clearly hint that one should look for signs of short covering or fresh shorts that can make Nifty drift lower or move higher.

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