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Nifty likely to Retest December Lows of 4530

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Nifty likely to Retest December Lows of 4530

Once again there is a higher possibility for the Indian indices to test December lows, as small relief rally seems to be over with Nifty failed efforts to show the resilience above 4950 levels. The support zone of 4770-4830 is likely to be tested once again in the 1st half of the June series and closing below 4770 will confirm more bearishness and a possibility of retesting December lows.

On the expiry day, selling of INR 1251 crores in index futures and buying of more than INR 1700 crores in options in last few days adds warning signals before the showdown. The rollovers also shows lack of confidence as Nifty rollovers were below 60% in May expiry for the 1st time in over a year. The month of May exactly performed as per one of the famous saying of stock market i.e. SELL IN MAY AND GO AWAY” as Nifty lost more than 6% to close just marginally above 4900 levels against the previous month close of 5248.

The month of May was clearly the one to forget for not only the Indian markets but also for Indian economy, as Rupee ended the month at new life time low above 56 levels against USD. A small pull back to 54.50 cannot be ruled out, in which timeframe Nifty futures may see a small pull back rally up to 5085 levels, where Nifty will face very strong resistance, but rupee looks far away from the bottoming out and looks set to achieve another long term target of 58 levels in next few months against USD.

Nifty O.I. stands at 0.91. For the June series, highest open interest buildup is seen at 4500 Put and 5000 call, adding more importance to 4770 levels on closing basis for Nifty, below which selling pressure can increase to reach the eventual target of December lows.

Sectors likely to underperform in the next 2 months would be automobile and infrastructure sector. Stock specifically significant correction can be seen in stocks like TATA MOTORS, BAJAJ AUTO, MARUTI AND HEROMOTORS in the month of June.

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Where do we go….

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What catches our eyes in this morning’s newspapers is whether yesterday’s rally was the end of the fall or just a dead cat bounce.

Let us just dig slightly deeper into what entailed the markets in yesterday’s trade, to draw a picture of where it’s heading in the near term.

Taking a glance at the inflows, the FII’s were net buyers yesterday, and the DII’s numbers were flattish. The trend since the last few days has been FII’s selling, with mixed activity from the Domestic Institutions. This indicates that there is a definite air of caution amongst the investors, either they prefer profit booking at higher levels on Nifty or they prefer to stay out in times of confusion.

If we look at the option activity, we are seeing the Open Interest buildup in Nifty calls have seen a buildup in Options from 6400-6500 to 6300 levels for current month, which signals that investors have mellowed down the probable rise in the market for this expiry. And 6300 levels seem to be a threshold for strong supply. In the put side, the 6000 put has consistently seen a strong buildup in open interest, which probably indicates that the fear begins to creep in below 6000 levels in the market.

Technically the chart setup suggests that the uptrend has taken a setback, with a dip in RSI and MACD being in the sell mode. Only a breach of 6230 levels on the upside could signify that this fall was just a blip in the rally, and market will resume its uptrend. However on the downside 5930 levels would be a crucial support.

Generally the markets look very fragile when they are testing the support as a multiple attempt in a short span of time. The tendency then becomes to break the support, create confusion amongst the investors and traders, and then resume the next move.

Whether there is an actual change in the global scenario with China, being the volatile market it is, facing strong selling pressure. The picture would enfold going forward, but to make a conclusion now can lead to misinterpretation of the markets.

Trade with caution, and play stock specific. This should be the ideal strategy for the day.

Adhere to your stop losses.

It is always good to accept your mistakes and come back strongly rather than being rigid and not learning from them

 

Written by Kunal Bothra

November 16, 2010 at 6:42 am

Posted in Morning Markets

Tagged with , , ,