Short-term trend: Consolidation phase to cool off from oversold zone

The Nifty has approached the oversold zone after correcting by 15% over the past eight weeks. Hence, we believe that the index could undergo a trend reversal process.

Nov 01, 2018 05:11 IST IIFL Derivative Desk Raushan Kumar |

The Nifty has approached the oversold zone after correcting 15% over the past eight weeks. Hence, we believe the index could undergo a trend reversal process. Hence, as long as the index remains above 10,000 on a closing basis, it will eventually head towards 10,600 in the coming days. So, the market is expected to move in a range between 10,000 and 10,630. Why?
  1. The percentage of stocks above the 200-day average have reached 10%, which has historically been the bearish extreme and coincided with market bottoms.
  2. Since December 2017, each directional leg (bullish/bearish) in the Nifty has lasted for seven to eight weeks. In the current scenario, the ongoing corrective decline has already consumed eight weeks. So, the ongoing correction was mature in the last week and now we expect a bull phase of seven to eight weeks.
  3. Short-term support is placed at 10,000-9900; why is that? 
  • Since 2008, there have been eight occasions when the index correction was greater than 10%. Out of eight, on six occassions, the average correction has been 15%. 
  • The monthly low of March 2018 was placed at 9,952. 
  • High Put OI is placed at a strike price 10,000 with 42 lakh shares.
 
A downward breakthrough of the 9,950-9,930 level can intensify the selling pressure and drag the index down to the next support at 9,800 or 9,500 levels in the short term.

Further, the positions built on Nifty call and put options expiring on November 29 show that the market gets major support at 10,000 (High put OI) and faces resistance at 10,700 (High call OI). This means that the Nifty has the potential of initially rising by 3% from Wednesday’s close of 10,386. Hence, any dip should be used as an incremental buying opportunity with support of the 10,000 level that would aid the Nifty to challenge a high call OI of 10,700.
 
Medium-term trend: 

As long as the index trades below 10,700, the medium-term trend has been down for the index. Why?
  • The Nifty has started the new series with 21.4 million shares, which is almost 30% higher compared to the last series.
  • 200EMA is placed at 10,707.
  • India VIX is above 90 percentiles and currently at 20 (1-year high/low: 23/10.80). Higher volatility suggests that the bears are likely to hold the market. Historically, it has been observed that India VIX and Nifty50 enjoy a negative correlation. In a bear market, the VIX level is on the higher side and vice-versa.
  • The daily as well as weekly price rate of change indicators feature in the negative terrain implying selling pressure.  
So, a strong rally beyond the key immediate resistance level of 10,700 is required to alter the medium-term downtrend and take the index higher to 11,000 or 11,200 levels.  
 
 
Which indicator should we watch for to know medium-term trend reversal?
  • India Vix below 15
  • Index ratio above 2.45
 
Which global events should be watched out for?
  • Sino-US trade war
  • US FOMC rate decision
  • US mid-term election 
Which domestic events should be watched out for?
  • The outcome of elections in five Indian states in November and December.
  • RBI and government meeting outcome
  • RBI monetary policy (1st week of December)
 
What is the best option strategy at the moment?
  • Positional trader: Can use Call Hedge, Bear Put Spread, and STRIP
  • Short-term trader: Can use Delta Neutral, Delta Gamma, Long Condor, Long Calendar, and Ratio calendar spread

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