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A real boomerang

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Markets made a perfect 'U' turn last week. The first three days of trading was negative with Nifty losing around 2.52 per cent, but it gained back all that it lost on Friday, October 7 supported by strong cues coming in from US and other Asian peers. FIIs were net sellers till Wednesday, October 5 starting from first day of this month to the tune of Rs 2,058 crore. Last week, we had some domestic data along with cues pouring in from the European zone, which kept markets in the tussle.

Major blow
On the domestic front, the major blow came in when Moody's Investor Service downgraded SBI to D+ from C- citing concerns that the bank's bad loans are continuing to rise and proposed capital infusion in not taking shape. SBI's advance tax payment fell 11 per cent to Rs 1700 crore in the June-September quarter, which strongly indicates that the bank will post lower profits this quarter. It however reaffirmed the C- rating of ICICI Bank on a strong financial and franchise base. In the short-term, one has to expect turbulence in this sector, but for the long-term investors this is the right time to enter into the banking sector.

Tight range
The Nifty may trade in a tight range of 4700-5060 in the short-term, but may take cues from quarterly numbers, expected to come out from October 12. The short-term resistance for the Nifty will be at 4928 and support at 4785. The initial data, which we got from the advance tax numbers were mixed in nature and the upcoming quarterly results are already discounted in the market. The good news is that the exporter's margins can be boosted by the weak rupee. 

The rupee is likely to get resistance at 48.9505 and 48.4384. The immediate support will be at 49.9453 and 50.4796. Investors can buy TCS 1040 call option and 210 Sesa Goa call and also one can buy TISCO 420 call.

Precious metal
The precious metal, gold, has immediate resistance at $1666, and has resistance at $1708. Investors with less of an appetite for risk can buy TCS October futures with 1040 October TCS put options. Even a long straddle on TCS can be initiated at least five days prior to quarterly numbers; especially the strike price can be selected at 1040.
 
Food inflation, which has remained a prickly problem, has again gained to 9.41 per cent for the week ended September 24 from 9.13 per cent, previously led by rise in the price of vegetables, fruits, milk and protein based items, while the fuel price inflation remained unchanged at 14.69 per cent. 

The rains, however, were recorded 1 per cent above the 50-year average, raising hopes of improved crop supplies during the ongoing festival season. The HSBC Services PMI fell to 49.8 in September from 53.8 in the previous month, showing moderation in service sectors like banking, construction and telecom. India's exports soared 44.25 percent to $24.31 billion, while imports grew 41.82 percent to $38.35 billion in August, widening the trade deficit to $14.04 billion from $11.1 billion. 

On the Nifty Short Straddle is advisable. Investors can sell the 4900 October call options and put options for a holding period of five working days.

Downward direction
Economic data from the global arena too was supporting an uptrend. On the European front, the French manufacturing PMI at 48.2 against 47.3 while German PMI rose to 50.3 against 50. 

The French government budget deficit widened to -102.8 billion against an estimated -105 billion, while the European retail sales slipped to -0.3% from 0.25 previously. In the US, the ISM manufacturing index rose to 51.6 against 50.6, total vehicle sales rose to 13.1 million against 12.1 million. The ADP non-farm employment change rose to 91000 from 89000 and the initial jobless claims were at 401000 against an estimated 411000.

Crude has completed its downward direction and it is facing resistance at $83.77, if it breaks and trade at least two days above this then it can easily test $86 and $92. Strong supports are visible at $81.29 and $78.40.

Alex K Mathews is the author of Financial Services And Systems, as well as Option Trading: Bear Market Strategies published by Tata McGraw Hill. He is also the technical and derivatives research head of Geojit BNP Paribas Financial Services Ltd. The author may have a vested interest in investments he has recommended.

Feel free to e-mail him at alex@geojit.com. Geojit BNP Paribas has membership in, and is listed on, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Disclaimer: No financial information whatsoever published anywhere in this newspaper should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is  for educational and information purposes only and under no circumstances should be used for actual trading or making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment or trading decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at his or her risk.

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