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K.S. Badri Narayanan

Nifty outlook: Last week, we had anticipated a negative outlook for Nifty and had recommended shorting Nifty futures keeping stop-loss at 2013 points.

But quite contrary to our expectation, the Nifty defied gravity all through the week and scored handsome gains.

For the ensuing week, we expect the possibility of a short-term trend reversal in Nifty as technical indicators point towards that.

Strategy: The Nifty June futures closed 2047.45. Investors may consider shorting the Nifty futures if the spot Nifty dips below 2047 levels. In that event, the Nifty may go further down to 1995-2001 levels.

Volatility view: The implied volatility of puts and calls witnessed a divergent trend. While the puts IV jumped to 22 per cent from the previous week levels of 18 per cent, the calls IV slipped to 10 per cent (17 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks; the firmness in puts IV indicates that traders are betting on the downside of the market. The weakness in calls IV indicates the calls are trading cheap as not many are betting on the upside of the market.

However, the annualised volatility levels improved to 21.89 against the previous week level of 21.34 per cent (much above the implied volatility levels); this indicates that the Nifty is likely to trade in volatile zone.

Put/call ratio: The volume-wise put/call ratio on Nifty remained firm at 0.94 (0.91) and open interest-wise at 1.11 (1.35). However, the open interest PCR jumped to 1.60 level mid-week. The firmness in open interest of PCR paints a negative picture as traders have kept their long positions open in anticipation of a decline in Nifty.

The intra-week spike to 1.60 levels suggests that day-traders seemed to have been squeezed in the bull carnival as they expected some correction in the latter part of the week.

Backwardation: The discount widened further for the Nifty futures; the Nifty June futures now trails the Nifty by whopping 28.95 points against the previous difference of 18.7 points

The huge backwardation in Nifty futures also indicates a negative bias for the Nifty as more players seemed to have gone short on the Nifty futures.

Cost-of-carry: It also paints a negative picture, as cost-of-carry also widened sharply indicating traders are not willing to carry over their positions.

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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