Signs of a dead cat bounce

Traded volumes were in line with Monday's session but was lower than the 10-day average.

The market breadth was negative as the ratio of advances to declines on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) combined stood at 858 : 1721.

The capitalisation of the breadth was positive as the figures on the two bourses taken together stood at Rs 3,762 crore: Rs 2,111 crore.

Derivatives data available for the previous session shows a marginal rise in open interest "" outstanding call options have surpassed the futures with bulls taking defensive action. This shows the nervous undercurrent in the markets.

The indices have attempted to rally but the upsides have seen stiff selling resistance from nervous bulls who have preferred to offload on advances.

The immediate support for the Nifty is at 1667 levels and for the Sensex at 5350 levels.

The upsides are likely to be capped at the 1727 and 5450 levels on the Nifty and the Sensex, respectively "" if the bourses rally that much in the first place.

The breadth shows buying polarisation in index heavyweights "" an attempt to prop up the indices.

This kind of support is invariably temporary in nature and the upmoves are essentially dead cat bounces. The outlook remains extremely cautious.

The outlook for the markets on Wednesday is of caution as the turmoil in the forex markets has seen the rupee rally by a whopping 22 paise to close at 44.87.

This is likely to impact exporters, especially software firms, negatively. It will affect the broader markets too.

The fact that the indices are still below the erstwhile support levels of 1750 and 5550 implies that Tuesday's was indeed a relief rally.

I continue to advocate selling deeply out-of-money calls on the Nifty in the mid month series for steady gains. Exposure though must be kept limited.

Vijay L Bhambwani, is CEO, BSPLindia.com

The author is a Mumbai-based investment consultant and invites feedback at vijay@BSPLindia.com or (022) 23400345 / 23438482.

Sebi disclosure: The analyst has no exposure to the scrips mentioned above.