The Hindu Business Line : Bullish undertone

Nifty outlook: As has been anticipated, the Nifty was volatile last week touching an all-time high of the 2400-mark before settling at around 2383 points.

Keeping in mind the volatility in the market, we have been advising investors contrarian strategies i.e. - both long and short with resistance & support levels. Likewise, last week we had advised investors to go long on Nifty if it stays above 2385 and short if it dips below 2350. Those who had gone long on Nifty would have earned decent profits, as it had touched 2425 during intra-week. For the ensuing week, the volatile conditions are likely to prevail. The F&O settlement week (for the August contracts) is also expected to induce a high degree of volatility.

However, good accumulation in the September contracts on the calls side, decrease in volatility and decline in put/call ratio suggest that the market is expected to bounce back from lower levels, as there is no persistent weakness.

Strategy: As 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. Investors are advised to go long on Nifty, keeping a stop-loss at 2380 levels (spot). The Nifty could go up to 2425-35 levels if it holds on to 2380.

On the other hand, if Nifty is unable to sustain 2370, then it could dip to 2350 and 2335 levels. For short-position, the protective-loss could be the day's high level at the time of entering deal. The possibility of the former happening looks bright as the undertone looks bullish.

However, we advise traders to be cautious due to the impending settlement of August contracts.

Volatility view: The implied volatility of puts and calls weakened slightly; the puts IV decreased to 17 per cent from the last week figure of 18 per cent while that of calls to 18 per cent (19 per cent). This indicates that the prevailing trend may continue on Nifty. The annualised volatility remained higher at 20.13 per cent against the previous week figure of 20.63 per cent.

Put/call ratio: Open Interest put/call ratio, which was bloating week after week, declined sharply to 1.66 (1.82). The volume-wise put/call ratio also declined to 0.84 (1.03). The decline in volume PCR indicates squaring up activity took place ahead of settlement of August contracts, particularly on the puts side.

Backwardation: The basis of Nifty August futures mimicked the Nifty ahead of settlement of August contracts. It now rules a tad higher at 2384.80 against the spot close of 2383.45. As only four days are left for the settlement of August contracts, it is not a surprise that both futures & spot have converged.

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

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