The Hindu Business Line : Downward bias likely in Nifty

Nifty outlook: Last week, we had expected a limited upside for the Nifty and indicated a support level at 2230; we had indicated that if it breaches 2280 levels it could go up to 2295-2300 levels. But the Nifty did not see a correction and instead it broke the 2280-resistance to reach an all-time high of 23232.55 during intra-week.

Expecting a downtrend, we had suggested shorting the Nifty keeping a stop-loss at 2280. But, the positions could have generated a loss of Rs 1,500 a contract considering the opening level of the Nifty at 2266.65 last Monday.

For the coming week, the Nifty may see weakness with sentiment indicators such as put/call ratio, implied volatility and cost-of-carry pointing towards such an outcome. The initial support level appears to be at 2285 (for spot Nifty) and if it dips below that, it could touch a low of 2265 and may even touch 2242-35. On the contrary, if the Nifty stays above 2235, it could gain up to 2250 levels.

Strategy: Investors may consider shorting the Nifty futures if the spot Nifty dips below 2285. Since the strategy is to take advantage of small reversal in prices, the position may run counter to the primary trend. Protective stops are, hence, important.

Volatility view: The implied volatility of puts and calls behaved differently; the puts IV jumped sharply to 24 per cent against the last week figure of 16 per cent while the calls IV remained flat at 16 per cent (15 per cent). The sharp jump in puts IV indicates a lot of activities on the puts side as traders could have rolled over their puts positions to the September contracts from August series. Due to the sharp run-up in Nifty, the calls positions could not have been rolled over. The annualised volatility dipped marginally to 19.09 per cent from previous week levels of 20.40 per cent. This also indicates that the Nifty could see a downtrend as the puts IV is much above than annualised figure.

Put/call ratio: Put/call ratio has been rising week after week. While the volume-wise put/call ratio on Nifty declined marginally to 0.60 (0.86), the open interest PCR jumped to 1.94 (1.89). The jump in OI put/call ratio indicates that there has been a large activity on the puts side; this could be due to an expectation of a correction or due to hedging of long positions in cash or futures market.

Backwardation: The basis of Nifty futures also witnessed a volatile pattern, particularly on Friday, the settlement day for July contracts. However, the Nifty August futures, now trails the Nifty by 11.60 points against the previous week's figure of about 10 points.

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

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page