The Sensex is likely to remain range bound between 2930-3040, with a breakout possible only on a volume surge
Market Wrap: The market recovered slightly last week, although the breadth signals were contradictory enough to suggest caution. The Sensex closed at 2995.77 with a gain of 2.23 per cent. The Nifty closed 2.40 per cent higher at 971.05. The Defty was up by a similar amount as the rupee-dollar relationship remained stable.
Breadth signals showed divergence. While the ratio of advances to declines was stable, trading patterns narrowed with fewer stocks being actively traded. The BSE-500 increased by 3.46 per cent but smaller stocks went off the radar. The put-call ratio remained stable in a neutral zone. Volumes improved marginally but tapered off on Friday.
Outlook: The breadth signals don't confirm a clear turnaround. The chances are high that the market will run into resistance around 980 Nifty/Sensex 3040.
Since the support at Sensex 2930/ Nifty 945 has held through the last 10 sessions, the support and resistance are both pretty powerful. It is likely that we'll see range trading between 2930-3040, with a breakout possible only on a volume surge.
Rationale: The market is still listless; initial results have been okay since expectations were not very high. There will be a flood of results through the next two weeks. Until those come in, there cannot be a clear call on the market direction.
Counter view: If the support at 2930 is broken, the Sensex will find the next support at 2830. If the resistance at 3040 is broken, there is an upside target of around 3150. Any breakout in either direction is likely to be preceded by a signal of consistently higher volumes.
There is a chance of a trend being established sometime in the second-third week of October if Fibonacci calculations of timelines can be relied upon. So we may be on the cusp of a trending move. It's impossible to guess in which direction; the signals are too mixed.
Purely on the basis that the market is at historically low levels, there is room for cautious optimism. The IT sector has often pulled the markets up, which is another sign of hope.
Bulls and bears: The IT sector was the main driver for bullishness this week. Infosys results and guidance enthused the market and so did the Hughes Software results. Wipro and Satyam were also strong on expectations of good results and Zee Telefilms saw some buying. The IT movements have been selective.
Among other stocks, there was a mixed trend. Apollo Tyres, Cipla, DRL, Essel , Tata Power, Telco and Trent all moved up slightly. Hindalco took a hammering while Hero Honda and Bajaj Auto both eased down. The Nifty futures are all at a slight discount to spot. Perhaps a buy on October Nifty would be worthwhile, if one takes the view that the market will turn bullish.
Take a view on combining the 940 Put and 980 Call. Buying both options will win if there is a breakout from the 945-980 trading range; selling both will profit in a range bound market. A breakout before October 31 is likely, so it makes more sense to buy both options.
