F&O data hint at overbought market, blue chips lend support

Mumbai: A key indicator in the equity derivatives segment is pointing to an overbought market after a rally of 49 per cent in the India’s benchmark indices from their March lows.The PCR or put call ratio touched 1.87 on July 21. On Friday, the ratio stood at 1.73 — still near extreme levels — which indicates complacency among participants at the higher levels.Put call ratio is a popular technical indicator.Analysts said a higher PCR is usually positive, but a much higher PCR is giving signal that the market is overbought.“We are in the expiry week, which might be one of the reasons for higher PCR. People write puts on the expectation that the market won’t go down in the few days before expiry. If put writing is happening, it means participants don’t expect market to go down. Buying in heavyweights like Reliance is giving confidence that market won’t go down,” said Chandan Taparia, derivatives analyst at Motilal Oswal. “Much higher PCR indicates caution,” he said.The level (PCR by OI) of 1.87 on July 21 was the highest since April 30 this year, when it touched 1.89. When the PCR hit 1.89 levels this year, the Nifty slipped to 9,050 level from 9,900 level in one month, said analysts. Similarly, PCR by open interest touched 1.89 levels on January 23, 2018 after which the Nifty dropped from 11,100 to 10,100 in three months, said analysts.“Put writers are aggressive and it means that people are confident that the market will remain strong. Participants believe the downside will be capped and have written 10,700-11,000 put strikes,” said Rajesh Palviya, head — technicals & derivatives at Axis Securities. “Call options data show writing at 11,500. However, when such aggressive put writing becomes visible, sometimes, participants become cautious when such easy money is to be made. This why the market is correcting from the top in the last one or two days,” said Palviya.Some analysts believe that the market would remain stable in the expiry week, but caution could set in at higher levels.“When PCR comes to this range the market tends to correct. This time, FII money is coming as dollar has broken the one-and-half year low, the dollar index is below 96, so the market should be stable in the coming week. But if 11,500 is hit, then caution will come into the market,” said Amit Gupta, head of derivatives at ICICIdirect.

from Economic Times https://ift.tt/30NhepH