Weekly Review of India Stock Market

Indices move upwards; corrective decline likely

Sundaramurthy Vadivelu

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First, the GOOD news:

On Friday, the National Stock Exchange revised the price bands (also known as the operating range) for 214 stocks. Out of these, price bands were increased for 209 stocks. For 90 stocks, 10% price band is applicable instead of current 5%; For 10 stocks, 20% price band will come into existence replacing 5%; The remaining 109 stocks’ price band has been increased to 20% from 10%. This means that the liquidity for these stocks will increase. Surely a good news for the market.

Next, the not so good news:

The Nifty has failed to close above 4530, an important resistance level.

In last month’s review, I had mentioned that the index needs to form a higher high and higher low to resume uptrend for achieving the next target of 4935.

Date	Points Gained	% Gain
03-Sep-07	10.75	0.24
04-Sep-07	4.50	0.10
05-Sep-07	-3.40	-0.08
06-Sep-07	42.75	0.96
07-Sep-07	-9.10	-0.20

Except on Thursday, the Nifty gained or lost very marginally. The overall gain during the week for Nifty is 45.50 points or 1.02%.

http://groups.google.com/group/theindiastreet/web/Nifty_Daily_070907.jpg

It can be seen from the daily chart that as resistance level is approached, the volatility increases. Once the Nifty went past 4530, a minor sell off occurred on Friday. This has resulted in a long upper shadow. A ‘doji’ was formed on Tuesday, indicating that market is not sure which way to go.

As of now, there are no significant reversal signs in the daily chart. A “bullish engulfing” pattern has been formed on Wednesday and Thursday. This formation, when occurs near support levels at the end of a downtrend is a reversal sign (it of course needs a confirmation on the third day). Whereas, if it is formed on the top of an uptrend, it is referred to as “double lovers’ suicide’ by the Japanese, meaning more people will jump into the rally thinking it would continue further. But profit booking may start, keeping all those who entered the stock (near the top of the trend) at bay.

Forecast for the next week:

Now we have only a clue; there is no confirmation. But on Friday, the long upper shadow indicates some sell off. So, a corrective decline next week cannot be ruled out. In such a case, one has to watch out for 4340 and 4211 which are 38.2% and 61.8% retracements in daily chart. Since Nifty is on first wave, a new support level should occur as trading goes on.

Nifty future traders may enter long positions only after confirmation of the trend reversal. Short sellers on the other hand, may see some profit initially, but in bull markets they are the ones who suffer most.

Nifty continues to be bullish in medium term and long term charts.

Sensex:

http://groups.google.com/group/theindiastreet/web/Sensex_Daily_070907.jpg

In the sensex also, a “bullish engulfing” pattern has been formed on Wednesday and Thursday. A bullish “three inside up” pattern has been formed at the bottom of the downtrend (compare this with the bullish “three outside up” pattern in Nifty). The sensex too, is poised to witness a correction. The support levels for the sensex are 14979 and 14521.

The weekly charts of Nifty and Sensex are given below. Note the formation of candlestick patterns in both the charts.

http://groups.google.com/group/theindiastreet/web/Nifty_Sensex_W_070907.jpg

In case of Sensex, a bullish “Homing Pigeon” pattern formation occurred while the Nifty encountered a bullish “Three inside up” formation. It is quite possible to analyze both indices simultaneously, but for the sake of simplicity it is good enough to analyze one.

The India Street selected some stocks as short term picks. The following table shows their status.

Scrip	Close 29-Aug	Highest Close	% Gain
BOMDYEING	542.45	611.10	12.66
GTLINFRA	34.30	36.85	7.43
KOTAKBANK	699.35	732.50	4.74
SCI	178.85	202.00	12.94
SUNILHITEC	204.70	250.75	22.50

Our medium term pick XL Telecom Limited closed at 180.65 (on June 29 its close price was 134.25) gaining 34.6% in just over two months time.

Advance / Decline Ratio:

Date	Adv.	Dec.	Unch.
03-Sep-07	849	276	25
04-Sep-07	699	422	30
05-Sep-07	557	572	21
06-Sep-07	712	405	31
07-Sep-07	502	636	15

Top Gainers / Losers among Index stocks:

Scrip	% Gain	Scrip	% Loss
REL	9.11	BHARTIARTL	3.61
SUNPHARMA	8.76	GLAXO	3.01
CIPLA	8.34	BPCL	2.20
GRASIM	7.87	ZEEL	1.18
HDFC	7.56	ONGC	1.03

Top Gainers / Losers in overall market:

Scrip	% Gain	Scrip	% Loss
AMBICAAGAR	46.64	PATNI	12.01
DECOLIGHT	45.19	JAYAGROGN	10.63
AKSHOPTFBR	39.78	USHAMART	7.09
SAREGAMA	34.70	TELEDATAIN	7.02
SAMTEL	34.63	WELGUJ	6.93

Sundaramurthy Vadivelu

Suggested Reading

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India Stock Market – Weekly Review Indices appear to have bottomed out!

By Sundaramurthy Vadivelu

Disclosure

In the last week’s review I had written that 3972 is a critical level and the index needs to be watched for a close below it.

This week, many people seemed to have been confused by the movement of Nifty. Over the last 6 days, we have been seeing selling followed by buying; this has happened for three times in a row. What does this have to do with futures traders? Apparently, they are not sure whether to go long or short.

Last Friday the index lost 70.55 points. But this Monday, it gained 101 points. On Tuesday and Thursday we saw index losing 134.15 points and 38.20 points respectively. On Wednesday and Friday, the index gained 78.25 and 75.20 points respectively. The total gain for Nifty this week is 82.10 points or 2%.

We had also indicated that worst for the index is possibly over. This appears to be so, even though we may see some more volatility next week.

We will now examine the daily chart of Nifty and see what supporting evidence we have to conclude that the market may have bottomed out.

http://groups.google.com/group/theindiastreet/web/Nifty_Daily_240807.jpg

The possible market ‘bottoms’ have been shown in boxes above. It may be noted that ‘red’ candles have been followed by ‘green’ candles or buying immediately followed selling. This indicates lot of buying support at these levels. In the last six days of trading we have seen alternate selling and buying. So we may conclude that the index is in the process of bottoming out.

The stochastics indicator (middle chart) indicates that it has attained a double bottom. The falling –DI in the lower chart indicates that Nifty is headed towards a possible reversal.

Forecast for next week:

http://groups.google.com/group/theindiastreet/web/Nifty_Weekly_240807.jpg

In the weekly chart displayed above, we can see the bullish “harami” candlestick pattern. The real body of the green candle lies within the real body of the red candle and also the shadows of green candle are within the shadows of the red candle. This gives medium reliability for the pattern. Ideally, the entire greencandle within the real body of the red candle would be highly reliable. This harami pattern, when followed by a green candle and higher close either next week or next two weeks would confirm the reversal pattern. This means that the index needs to close above 4325 in the next two weeks.

Since the index has still not closed yet below 50% retracement level in the weekly chart, there is every possibility that it may close above 4325 either next week or the week after next.

Futures & Options Market:

The following chart (courtesy: www.nseindia.com) shows the status of underlying open interest in the August futures contracts for Nifty.

http://groups.google.com/group/theindiastreet/web/FnO_NF_240807.jpg

“Open interest” means the number of total contracts which have not been exercised (outstanding in the market). It can be seen from the above chart that open interest is declining while prices are also declining. This implies that the long positions are being liquidated. In other words, the bull market is still intact. Since open interest is not increasing no fresh short positions are being added to the market.

Advance/Decline Ratio:

Date	Adv.	Dec.	Unch.
20-Aug	857	263	14
21- Aug	82	1046	8
22-Aug	490	634	15
23-Aug	349	759	31
24-Aug	778	323	30

Top Gainers / Losers among Index stocks:

Scrip	% Gain	Scrip	% Loss
BHEL	12.37	HCLTECH	7.98
STER	11.45	CIPLA	7.55
BHARTIARTL	8.61	PNB	6.37
AMBUJACEM	7.11	SUNPHARMA	4.03
TATASTEEL	7.07	WIPRO	3.58

Top Gainers / Losers in overall market:

Scrip	% Gain	Scrip	% Loss
SELMCL	51.05	ATLANTA	17.57
CHAMBAL FERT	25.40	OMNITECH	17.03
PATNI	22.37	IILTD	16.26
PAVCI	15.77	WALCHANNAG	14.85
EUROCERA	15.36	TFL	14.77

SEL Manufacturing Company (SELMCL) is a new issue.

Sundaramurthy Vadivelu

Suggested Reading

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India's Futures & Options Market : An outlook

The term “futures and options” (also known as derivatives) refers to contracts which are traded in financial markets. A futures

contract requires delivery of a commodity, bond, currency, stock or index, at a specified price, on a specified future date. The physical delivery of underlying asset may or may not happen. Instead, it may be squared off before its expiry date. For example, if a person is “long” on index future i.e. who bought the contract at the beginning of the month may sell it just two days prior to its expiry. The difference in the value of contract will be paid to him as profit (or deducted from his account as loss) as the case may be. Similar to trading stocks, a certain percentage of the traded value will be levied as commission (brokerage), a service tax (to the brokerage amount) and a securities transaction tax (STT). The brokerage may vary for different brokers. Some may charge a fixed brokerage; some may charge based on traded value.

There are 1 month, 2 month and 3 month futures contracts available in India. The contracts are settled on the last Thursday of every month. If this happens to be a trading holiday, the previous day would be the expiry date.

The risk involved in trading a futures contract is equal for both buyer and seller or “symmetrical”. Futures trading also comes under the purview of Securities and Exchange Board of India (SEBI).

In case of short selling equity shares (selling a share one doesn’t possess) the trade needs to be squared off on the same day; otherwise the short sold equity shares will be sold in auction. The short seller will be penalized by the exchange for not squaring it off. But in case of futures no such thing happens; a person can carry a “short” position overnight. He can continue to do so till the expiry date. However, the minimum margin requirements need to be maintained. Margin money is defined as the amount, based on which the broker may allow purchase or sale of a stock or future; this margin also varies from broker to broker. In case of equity share purchases using margin trading, the buyer needs to pay the outstanding amount to the broker before a fixed date i.e. before he receives delivery of shares. In case of futures, stocks in possession can be used as margin for trading in futures; however, market to market obligations (such as losses) need to be met in cash.

Futures contract prices also have the same structure like the cash market prices. But there is no price band for futures or options; To avoid errors in entering orders the exchange may fix the price range. Prices in excess of the range will need to be reviewed by the exchange. In addition, if the “open interest” or the maximum number of outstanding contracts exceeds a certain value, no fresh positions will be allowed for the particular scrip.

An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a specified date. In the case of a stock option, its value is based on the underlying stock (equity). For an index option, its value is based on the underlying index.

Options are traded in the same way like stocks. They can be bought and sold just like any other security. In case of options, the buyer pays the premium amount only; not the value of the entire contract. The commission for the Options, however, will be based on the value (strike price) of the underlying assets.

There are two option types; Call and Put.

A Call option is an option to buy a stock or index at a specific price on or before an expiry date. Call options usually increases in value as the value of the underlying asset increases. The premium amount is paid by the buyer to secure the right to buy the underlying asset. In case, if one does not want to buy the underlying asset, he will lose the option premium paid; no other obligation exists between him and the option seller.

Put option is an option to sell a stock or index at a specific price on or before a expiry date. Similar to the call option, a premium amount is paid by the buyer of the put option. In case if he does not want to sell the underlying asset, as in the case of call option, he will lose the option premium.

There are two types of expiration; European style in which options cannot be exercised until expiry date; American style in which options can be exercised anytime before expiry. In India all stock options are American style and index options are European style.

Option contracts should never be short sold. If the market turns the other way around, the buyer or seller may want to exercise the option. In this case loss resulting from shorting the option will be huge; so short selling options is very risky.

“Strike Price” is defined as the the price at which the underlying security can be bought or sold as specified in the option contract. “Spot price” refers to the market price of the underlying security. An option writer is defined as the one who sells the option to the option holder.

Futures Contracts have symmetric risk profile for both buyers as well as sellers, whereas options have asymmetric risk profile.

In case of Options, for a buyer (or holder of the option), the downside is limited to the premium (option price) he has paid while the profits may be unlimited, depending upon the spot price and whether he wants to exercise the option or not.

Futures and Options trading at NSE:

In India, at the NSE, index futures trading was introduced in the year 2000. Index Options trading was also made available in 2001. Stock futures were introduced a little later. F & O index contracts are available in Nifty, Junior Nifty, Bank Nifty, CNX – IT (IT sector index) and CNX 100 (diversified 100 stock index accounting for 35 sectors of the economy). For individual securities, F & O contracts are available in 187 scrips, starting from Aban Offshore to Zee Entertainment Enterprises Limited.

The contracts are traded as “lots” meaning a contract will have certain fixed number of instruments. For example, the nifty shall have 50 instruments and it is called lot size. When a buyer places an order for a contract he has to bid for 50 or multiples of 50. Stock futures are available for most of the Nifty and Junior Nifty stocks. The stocks are chosen from amongst the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis. The market wide position limit in the stock shall not be less than Rs. 50 crores. The market wide position limit (number of shares) shall be valued taking the closing prices of stocks in the underlying cash market on the date of expiry of contract in the month. The market wide position limit of open position (in terms of the number of underlying stock) on futures and option contracts on a particular underlying stock shall be 20% of the number of shares held by non-promoters in the relevant underlying security i.e. free-float holding.

Daily turnover:

The daily turnover in F & O segment on the NSE for 22-Jun-07 is shown below:

Product	No. of	Turnover
	contracts	Rs. Crores
Index Futures	439509	9398.68
Stock Futures	737522	23255.47
Index Options	193118	4110.95
Stock Options	37754	1176.21
F&O Total	1407903	37941.31

The details for cash segment are given below:

Number of	Quantity	Value
shares	lakh shares	Rs. Crores
3517321	3406.03	9251.2

As it can be seen from the tables, turnover in F & O segment is 4 times higher than cash segment.

Risks and rewards associated with F & O trading:

Since F & O positions involve a certain time frame, if the trade is not squared off, it will be settled at the end of the month. So, open positions with losses in market to market carry a risk. In case of options, the investor faces the risk of losing the entire premium amount, if the market turns against his position.

Since contracts are traded in lots, the profits could be higher. Commissions are also less compared to cash segment. It is possible to remain short on the index or stocks whereas it is not possible in cash segment.

Usually the FII’s are very active in F & O segment. If the options have to be profitable, spot prices should move according to the positions of the holders i.e. increase in case of call options and decrease in case of put options. There is usually a hedging strategy (combination of long and short positions at any given time) to minimize risk. One may buy put options in the market; if he has to make money, he may sell stocks in the cash segment. So it will also depend on Put Call ratio, i.e. number of puts to calls at any given time.

It will be a good strategy to trade in F & O for active traders. They have access to all the price charts, open interest positions, FII activity etc.

SUNDARAMURTHY VADIVELU

The India Street