15 October 2011

PCR For Breakout ?

There is something about October Series which doesn't want me to believe the data! Nifty had a terrible August and a poor September, the start of October wasn't great and people (including me) were expecting 4500 to be tested soon and some even went ahead to say 4300 on camera! Overall sentiment was very pessimistic and that made difficult for Nifty to move lower.

But market always has a mind of its own. And it will punish the majority severely during turning points.  The rally Nifty has seen has been spectacular to say the least. Cutting the prelude, let me immediately come to the point which I am observing here.

The above chart is Nifty Vs Near Month Expiry Nifty PCR (Put Call Ratio). The upper panel shows PCR while lower has Nifty, the vertical lines are expiry dates. Focus on the upper panel for the time being. It shows Nifty PCR at a level not seen since June and March expiry (Red Lines). The June instance is on a day before and on expiry day. While March instance is few days before the expiry. Considering  we have 7 trading days still left for expiry, I am concerned about the optimism that has got built. Though build up of optimism is not bad, especially in option space, we should take this with a pinch of salt.

Now check what happened on Nifty during the March high PCR instance (I ignore June series as its too close to expiry and squeeze is expected from the losing side), Nifty almost went vertical from around 5550 region to close around 5800. Also note how it broke out from the resistance around 5550 (blue line) which had stopped it 2 times earlier (3rd time lucky?). Now doesn't it look very similar here in October series?

Breaking out of 5180-5200 zone by Nifty will surely make a strong case for another 200-300 point in this series itself. But could there be false break out given the news driven environment? Very much so, especially if there is no consolidation below this resistance. The rally here has been incessant and needs some more time to digest the current gain. But as in Life and so in Markets anything can happen! The inclination is for the long side, but there is something which doesn't want me to believe the data!


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