Technical Analysis

Is the market up for a reversal?

Akhil Nallamuthu | Updated on October 15, 2020 Published on October 16, 2020

BL Research Bureau

It was a bearish onslaught on the Indian market on Thursday. While the Nifty 50 dropped by 290.7 points (2.43 per cent) to end at 11,680.35, the Sensex lost 1,066 points (2.6 per cent) to wrap-up the session at 39,728.41.

The fall was led by IT and banking stocks – the Nifty IT index declined by 2.9 per cent whereas the Nifty Bank index was down by 3.3 per cent.

The market, which was under some pressure on Wednesday due to the possible delay in fresh stimulus from the US government, managed to pull off a recovery towards the end of the session. However, on Thursday, the bulls gave up despite a gap-up opening, and this resulted in a rout.

The UK government on Thursday announced stricter restrictions as the coronavirus continues to spread rapidly in the country. The increase in new cases remain a concern world over, and the fresh measures from the UK have triggered fear of more such actions in other regions as well. This contributed to the sell-off in the market.

Notably, institutional investors remained sellers yesterday, i.e. the net outflows of Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) stood at ₹604 crore and ₹808 crore, respectively.

Technical

In the daily chart, the Nifty 50 has formed a bearish engulfing pattern, indicating a possible trend reversal. Looking at the options chain of October expiry, 12,000 CE remains the most active call option as traders added 8,682 contracts of Open Interest (OI) on Thursday, bringing the total number of outstanding contracts to 32,024. Following this, 11,800 CE saw an increase of 4,841 contracts, taking the total number of outstanding contracts to 19,519.

The increase in OI in a particular strike shows that that price is of importance, at least concerning that expiry.

Here, the addition of OI is accompanied by a significant decline in price, it means that more ‘short’ call positions might have been added. This means participants do not expect the index to cross over 12,000-mark during the current expiry. Considering this along with the bearish engulfing chart pattern, it gives a bearish picture for the near-term.

On the other hand, 11,700 PE was the most active put option (October expiry) yesterday. It witnessed a reduction in OI by 5,451 contracts. This has brought down the number of outstanding contracts to 18,798. Interestingly, there is a considerable amount of build-up in OI in 11,000 strike put option. This contract has the highest outstanding OI in puts at 32,264. This is followed by 11,500 PE whose OI is at 29,589 contracts.

As it stands, the above factors mean that participants expect that 11,500 can be a good support for the index at least for the current expiry, as per the existing data. Moreover, the 21-day moving average lies at 11,500, making it strong support. So, there is a likelihood that the index might stay within 11,500 and 12,000 for the current expiry.

But one needs to be cautious about the build-up in OI in 11,000 PE, and this could be an indication that below 11,500, the index could find support only at 11,000.

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Published on October 16, 2020
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