After last week's steep plunge, a key market indicator is flashing green

livemint.com:

Subscribe to enjoy similar stories. The Nifty may be poised for a rebound after falling nearly 5% over the last four sessions, with a key indicator showing the selling frenzy has taken the index to oversold territory. The put-call ratio (PCR), which shows how many Nifty put options relative to call options (monthly as well as weekly series) are outstanding or open, has broken a one-year low of 0.7 to hit 0.69 on Friday, as per data analytics firm IndiaCharts.

The low PCR, while underscoring the bearish sentiment as foreign funds favour China and conflict clouds West Asia, signals that a bounce could be around the corner. "Whenever the top or the bottom of the range is tested, the markets reverse, at least in the short term," said Rohit Srivastava, founder, IndiaCharts. A 0.69 ratio means that for every 100 calls sold, only 69 puts have been sold.

Normally, the ratio ranges between 0.7 and 1.3. These levels can be broken, but the market tends to trade within the range. A low ratio signals traders are bearish, while a high ratio implies they are bullish.

However, when these touch extreme levels, markets typically make a short-term reversal. For instance, as early as 20 September, the PCR was 1.5 (150 puts sold for 100 calls sold) and the Nifty was at 25790. From there, Nifty has fallen 3% to Friday's 25014.6 and the PCR to 0.69.

On 4 June, the day of the Lok Sabha election results, the PCR was 0.73 and the Nifty closed at 21884.5. From there, it rose 8.4% to 23721 on 25 June, along with the PCR which jumped to 1.38. The Nifty has fallen 4.8% from a record high of 26277.35 on 27 September to 25014.60 on 4 October.