Five reasons for a market rally

The recent declines have knocked the wind out of many a traders sails. While it may appear that the end of the world is here, I present my contrarian views -

1) The open interest in the market has shrunk to Rs 91,070 crore as on Tuesday evening, as compared to nearly Rs 1,35,000 crore barely 10 days. The weaker hands are all but out of the game. While the process of elimination has been brutal, markets like chains, are as strong as the weakest links of the chain. Qualitatively speaking, the surviving players are much more stronger than the erstwhile bulls

2) The put-call ratio gives a fairly accurate picture of the market outlook as patient players tend to take a medium term outlook through the options route. Currently, the marketwide PCR is at 0.20 : 1, the Nifty PCR is at the 0.95 : 1. The Nifty PCR was nearing the 1.40 : 1 barely a fortnight ago.

These are indications that the bears do not see significant downsides from here. It is a proven fact that the bears are more savvy than the bulls and are bigger risk takers. If their risk appetite is shrinking, the bulls should step on the gas logically.

3) The implied volatility is at 116 per cent annualised, and that indicates a market that has moved out of whack. Implied vols are a measure like a leash around a dog’s neck.

The length of the leash determines how far the pet strays from the owner. At 116 per cent, the implied volatility is way too high to sustain the momentum on the declines. An upmove is in the offing.

4) The Fed rate cut will be a positive trigger for the market sentiments. While it may not reverse the bearish trend completely, the decline will be halted. Markets rally on cheaper money and end of long drawn wars. This fact is established by market historians.

5) Technically speaking the 4800 level is a multiple support as per many schools of thought. The level is close to the 200 day SMA and is also a retracement support as per Fibonacci studies. Having remained above this threshold on a closing basis, the bulls have proved their willingness and ability to defend this threshold.

As per oscillator studies, the markets are in an oversold zone and ready to leap higher provided a slight buying support is witnessed.