Sunday, October 11, 2009

Weekly Index Outlook 12th-16th Oct 2009

INDIABULLS POWER IPO
PRICE BAND 40-45
LOT SIZE : 150 SHARES
ISSUE OPENS ON 12th-15th Oct 2009
RECOMMENDATION: APPLY
 
INDEX OUTLOOK — Awaiting a pre-Diwali burst


Sensex (16,642.6)

Indian equities were in a dark and brooding mood last week despite the bonus announcement by Reliance Industries, Infosys upping its guidance for the current fiscal and slower growth in WPI.

As stocks drifted lower, attention shifted to rupee that strengthened past the significant resistance at 47.

Absence of the liquidity prop with foreign institutional investors turning net sellers in four out of the last five sessions could partly account for this lackadaisical movement.

Domestic institutional investors too were net sellers in the secondary market last week.

Volumes were however robust in both cash as well as derivative segment.

Open interest is nudging the Rs 1-lakh-crore-mark once again, showing that there is no let-up in speculative activity.

The momentum indicators in the daily chart are painting a bleak picture since the 10-day rate of change oscillator has declined in to the negative zone and the 14-day relative strength index is at 54.

This implies that a short-term down-trend is in progress. Weekly chart are showing a heavy negative divergence since May.

Despite weakness in momentum indicators, the scar left by last week's decline is superfluous.

The intra-week low of 16,606 is well above the key short-term support of 16,492 indicated last week.

If the index manages to hold above this level next week as well, it can then move higher to 17,200 or 17,560 in the near-term.

The medium-term view for the index stays positive and a weekly close below 16,000 is needed to negate this view. If we extrapolate the move from 13,219 low, the next medium-term target for the index is 17,467. As mentioned earlier, the peak at 17,735 is also a potential medium-term threat.

The truncated week ahead, before the Diwali festival lights up the bourses is likely to see some benign trading activity as most market participants would be busy spending their hard-earned profits. Sensex could head higher to 16,970 or 17,100.

If the index is unable to surpass the 17,100 mark, a decline towards 16,500 can follow. But move past 17,100 would take Sensex to 17,200 and then 17,420.

Supports for the week would be at 16,490 and 16,060.

Fresh short-term purchases should be avoided on a decline below the first support.

Nifty (4,945.2)


Nifty declined 138 points last week accompanied by high volumes as traders turned edgy. But the fact that the index resolutely held above the key short-term support at 4,900 last week is worth lauding. This leaves the door open for another spurt higher in the near term to 5,042, 5,100 or even 5,210. Traders can buy in declines with a stop at 4,900.

Caution should, however, be exercised if the index fails to move above the first target. That will imply that the index can decline to 4,845 or 4,780 in the near-term.

The medium-term trend continues to be up. But lack of momentum and the index nearing its key medium-term targets calls for dollops of caution. Though the index can rise a little further to 5,166 or 5,210 in the medium-term, the uptrend that began from July 13 low is nearing its final stages and a deeper or a more protracted correction could be around the corner.

Global Cues

Confidence returned to equity markets last week as better than expected economic readings buoyed sentiment sending many benchmark indices over 5 per cent higher. CBOE Volatility Index that had spiked close to 30 last week tumbled with equal speed to 23 towards the end of the week implying that all is well with the trading sentiment.

Many of the indices such as Chile's IPSA, Philippines' PSE Composite Index, Russia's RTS, Thailand's SET and so on recorded fresh break-outs and closed at new 2009 highs. Sri Lanka's All Share Index has gone on to a new life-time high last week after erasing all the losses recoded in 2008.

Dow had a fantastic week, with four strong days out of five. The index is all set to test the psychological 10,000 mark next week. If this level is breached, next target for the Dow would be the zone between 10,350 and 10,500 that is also the half-way mark up the previous bear market.

Commodities too had a strong week with gold dazzling investors with its rise to the intra week peak of $1061 per ounce. Immediate support for the yellow metal is at $1030 and a close below this level is required to signal a deeper correction in the offing. Reuters CRB index is testing the key long- term resistance at 450. Once this level is surpassed, the index can gain another 5 to 10 per cent.

PIVOTALS — Reliance Industries (Rs 2,100.05)


The bonus announcement that was expected to give a fillip to the sentiment on the RIL counter could not take the stock past the resistance at Rs 2,200. A three-wave move has been completed from the July 13 low in September and the sideways move witnessed since then could be a terminal corrective before the down move resumes to drag the stock down to our medium-term targets of Rs 1,727 or Rs 1,667. A strong close above Rs 2,200 is needed to signal an impending move higher to Rs 2,500.

The short-term trend in the stock is down but there is a strong support at Rs 2,070 where the 50-day moving average as well as the short-term trend line is positioned. Fresh shorts are therefore recommended only on a strong move below Rs 2,070. Subsequent targets are Rs 2,050 and Rs 2,010. Resistances for the week are Rs 2,163 and Rs 2,200.

SBI (Rs 2,066)

SBI led the market lower with 6 per cent decline last week. An evening-star pattern is apparent in the weekly chart that is a top reversal pattern. However, the decline needs to prolong below Rs 1,960 before alarm bells are sent trilling. First target of the intermediate term up-move from March lows is Rs 2,155 and then Rs 2,553. Since the first target has been achieved, the up-trend can terminate here. But we will retain a positive medium-term view as long as the stock holds above Rs 1,935.

The short-term outlook for SBI is negative and weaknesses in daily oscillators imply that the stock can decline to Rs 1,964 or Rs 1,890 in the near-term. Short-term traders can initiate fresh shorts in rallies with a stop at Rs 2,170.

Tata Steel (Rs 532.6)


Tata Steel did not decline below the key support at Rs 494 indicated in our last column and reversed higher to close 4 per cent higher. Short-term range for the stock is between Rs 490 and Rs 550. Since the stock has reached the upper end of this trading range, traders ought to be careful with long positions since it can reverse from here and decline to Rs 490 again. Fresh longs are recommended only on a strong close above Rs 550. Subsequent targets are Rs 560 and Rs 580.

Medium-term trend for the stock is positive and swing traders can hold the stock with a stop at Rs 490. Consolidation between Rs 490 and Rs 550 can be followed by a break-out to Rs 660.

Infosys (Rs 2,178.3)

Infosys followed our script closely, reversing lower from the peak of Rs 2,352 to decline towards our second target. A strong short-term down-trend has been established by the 14-day relative strength index declining to Rs 44 and the 10-day rate of change oscillator declining to the negative zone. The stock is however halting just above the 50-day moving average and a brief pull-back is possible from here that takes Infosys to Rs 2,324 or Rs 2,415.

Fresh shorts can be initiated on a failure to move above the first resistance. Downward targets would be at Rs 2,123 and Rs 2,061. We retain a positive medium-term view as long as the stock holds above Rs 1,900.

ONGC (Rs 1,220)


ONGC plodded higher to close at the upper end of its short-term trading range. As indicated earlier, a strong move past Rs 1,230 will take the stock higher to Rs 1,350 or Rs 1,390 whereas a reversal from current level can cause a decline to Rs 1,135 again. Traders can therefore initiate fresh long positions only on an emphatic move above Rs 1,230.

Maruti Suzuki (Rs 1,474.8)

Maruti Suzuki took a 11 per cent tumble last week resulting in bearish top reversal pattern in the weekly candlestick chart. The stock needs to close above the peak of Rs 1,740 over the next couple of weeks to avert the commencement of a medium-term downtrend. Short-term traders can hold with a stop at Rs 1,420. The medium-term view will however be roiled if only on a close below Rs 1,250.


 Strong & Weak  futures  
This is list of 10 strong futures:
OFSS, DCHL, IOB, Bajaj Auto, IDBI, Titan, Nagar Fert, Ultra Cem, HDIL & Canara Bank.  
And this is list of 10 Weak futures:
GMR Infra, Idea, Bharti Airtel, RCom, TV-18, Grasim, MTNL, Suzlon, Patni & HSL Tech.
Nifty is in Up trend
 
 FUNDS DATA
FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category Date Buy Value Sell Value Net Value
FII 09-Oct-2009 3127.01 3171.28 -44.27
DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
Category Date Buy Value Sell Value Net Value
DII 09-Oct-2009 1806.91 1720.19 86.72
 
SPOT LEVELS
NSE Nifty Index   4945.20 ( -1.14 %) -57.05       
  1 2 3
Resistance 5007.02 5068.83   5105.07  
Support 4908.97 4872.73 4810.92

BSE Sensex  16642.66 ( -1.19 %) -200.88     
  1 2 3
Resistance 16868.18 17093.69 17224.31
Support 16512.05 16381.43 16155.92
 
Index Strategy — Bull-call spread for upward trending Nifty

Option traders can consider setting a bull-call spread on Nifty for the coming week. Though the Nifty does appear ripe for some downside from here, in all likelihood it may trend upwards by the end of the week. A bull call spread proffers a low-risk low-return option to play any such upside. You can set the spread by buying a call option on Nifty while simultaneously selling another Nifty call at a higher strike price. We suggest traders to set this spread using option strikes of 4,800 and 5,000; that is to say, buy Nifty 4,800 call, which closed the week at Rs 210 and sell Nifty 5,000 call, which closed at Rs 95. Note that this will entail an initial cash outflow of Rs 115 a share (or a total of Rs 5,750 for per lot). While ideally both the legs of this strategy should be executed simultaneously to avail the benefit of lower cost of setting the spread (given the premium inflow from selling the options) you can time the transaction depending on how the markets open on Monday. For instance, if the market opens with a gap down, you can consider buying the call first as that would then fetch a higher price. Selling the higher strike call can be reserved for the time when market begins to trend upwards. A reverse of this can be considered if markets open higher.

Risk-return tradeoffs

Depending on how Nifty moves, this strategy will deliver returns within a range.

The breakeven for this spread would be at 4,915 (4,800 +115), i.e. strike price of the purchased call plus the net debit paid for setting the spread. This means that when Nifty moves past 4,915, your spread will turn in the money. The maximum loss that can occur would be limited to the cost of setting the spread. In this case it would be Rs 115 a share.

But since it is limited risk-return strategy, the maximum profit would be limited too. For instance, if the Nifty closes above 5,000 (say at 5,100), while your 4,800 call will deliver a profit of Rs 300 (5,100-4,800), the sold call at 5,000 strike will result in a loss of Rs 100 (5000-5100). So the net profit will be Rs [(300-100) minus the cost of setting the spread], which is Rs 85 a share. So, for an initial outlay of Rs 115 a share, you will stand to gain Rs 85 a share, if Nifty moves up. On the contrary, if Nifty were to close at any price below the 4,800, the strike price of the purchased option, then you will lose the money that was used to set this spread.

Exit options

Since it is a limited return strategy, traders can consider closing the spread once Nifty moves past the strike of the sold option. Similarly, if in the interim period Nifty starts to show signs of weakness, traders can consider a premature exit from the spread. Traders with a more bullish stance and high-risk appetite can set the spread using strikes 4,800 and 5,100 (cost Rs 153 a share) or strikes 4,900 and 5,100 (cost Rs 90 a share).

--
Arvind Parekh
+ 91 98432 32381
 
 



--
Arvind Parekh
+ 91 98432 32381