Writing was clear on F&O wall

After prolonging the expected correction in the two-week run-up to the July series expiry, the markets on Friday found an excuse in the US sub-prime mortgage turmoil to retract its rally.

The correction may continue, if one goes by the technical theory. The Nifty's close of 4445 points on Friday was below the 20-day average of 4473. This suggests that the NSE index may find support at the 30-day moving average of 4,348 and may reach the 50-day moving average of 4,329 points. The Nifty support on the basis of open interest positions in Nifty options is at 4,400 and 4,500, while resistance is at 4,500 and 4,600 levels.

The market was ready for a correction any time after the expiry of the July series if the F&O activity of foreign financial institutions (FIIs) was an indication. The FIIs were hedging net buying in cash with short positions in index and stocks futures.

The FIIs' trading data for July said they were net buyers of Rs 8,951 crore worth shares on the cash segment and net sellers of Rs 4,485 crore on the BSE and the NSE.

Also, short positions in derivatives strengthened in the last four days of the July series expiry. They were net sellers in index futures (Rs 2,587 crore) and stocks futures (Rs 1,224 crore). These short positions seemingly hedge with net buying in index options (Rs 2,150 crore) and net buying in cash markets (Rs 8,952 crore, according the BSE and NSE data.

The FIIs were allround sellers on the derivatives and the cash segment on Friday. They sold index and stocks futures worth Rs 5,343 crore and Rs 1,475 crore worth equity shares on the cash segment.

The negative bias in trading came to the fore almost ten days before the expiry of July series contracts. Apparently, the relative strength index (RSI) was indicating overbought positions. The five-day RSI zoomed to 92 a day before the expiry and the 14-day RSI touched over 85 twice during the week.

This indicated troubles in the technical parlance. Remember, it was on May 10, 2006, the 14 days RSI touched over 85, and you know the history.

Similarly, the put-call ratio of the Nifty open interest (OI) also averaged over 1.85 during the run up to the expiry, showing overbought positions.

During the last five days of the expiry, the market saw three bear attacks. The days when the markets were up, the advance-decline ratio was flat to negative. The rise in volumes, coupled with the negative breadth, also heralded troubles ahead. The open interest of over Rs 90,000 crore and the daily turnover of over Rs 50,000 crore in the F&O segment during the last week of the expiry fuelled the selloff.

Reliance Industries' first quarter numbers assuaged analyst expectations but they fell short of the punters'. The net profit of Rs 3,264 crore is well above analyst estimates of Rs 3250 crore, but the punters were expecting a net profit of over Rs 3,500 crore.