Following the August-September rally, when the index rallied 15 per cent, October saw a consolidation pattern. Historically, October has been a month of negative-to-flat returns. Therefore, we expect October to close on a flat note, with the rally picking up in November.
While defensive and consumer-driven stories continue to outperform, markets are looking at banking to lead the rally; with the results of both ICICI Bank and the State Bank of India (SBI) expected to lead the way.
From the technical perspective, since the low of 4,770 in early June, the Nifty has been rising in an upward moving channel, making higher highs and higher lows.
The Nifty met with resistance at the upper band of the rising channel at 5,815 (October 5) and corrected lower towards 5,635 levels. Thereafter, the Nifty has been consolidating at between 5,635 and 5,730 since the last two weeks. With the index now closer to the upper end of the range and positive crossover in daily momentum from the oversold zone, there is a high probability of an upside breakout. Breach and sustenance above 5,730 would indicate resumption of the uptrend towards the upper band of the channel at 5,900-5,950 levels.
Daily momentum has also formed a positive reversal with prices. This is a sign of strength, indicating prices could make new highs. The Relative Strength Index, too, has been rising in an upward moving channel. With the recent correction, prices have unwound from the overbought zone and are turning from the neutral zone at 50.
However, if the Nifty fails to breach and sustain above 5,730, it will continue to consolidate within its range (5,730-5,635) of the last two weeks. Only a decisive breakdown below 5,630 would indicate a change in short-term trend and push prices lower towards 5,550, which we feel is the maximum downside.
On the moving averages front, the 10-day weekly average is 5,548, which further supports our view of a maximum downside of 5,550.
So, as long as 5,550 holds, the uptrend in the Nifty is likely to stay intact for an upmove towards 5,900-5,950.
From the derivatives perspective, October yet again saw the put-call ratio (PCR) open interest (OI) starting below one, with highest call option accumulation at 5,800 levels - the main resistance point. Currently, the PCR-OI is at 1.07, with PE (put option) writers accumulating at 5,600 levels, implying that Nifty will remain sideways (5,580-5,820) in October.
The November PCR-OI is at 1.15, with 5,500 and 5,600 PE having the highest OI, implying the base of Nifty has shifted upwards. While the maximum downside expected is 5,550, on the upside we expect Nifty to touch a peak of 5,950.
India VIX has also made a new 52-week low at 14.76. If it moves below the intra-day 52-week low of 13.86, it would be clear that bulls have an upper hand, implying Nifty should move ahead of its previous high of 5,820.
The highest long positions are being added in banking and real estate, going forward in November also. This implies high beta is back and sentiment is positive, supporting our argument of the Nifty moving northwards.
The only cause of concern is foreign institutional investor flows, which are getting tepid, though they have not initiated any major sell orders. Also, they have not initiated any long volatility trades, which imply India VIX should not move up sharply from here. This also suggests they are in a wait-and-watch mode for events to pan out, i.e. corporate results and Reserve Bank of India policy, and above all the election results in the US.
The author is national head (derivatives), Aditya Birla Money
