The Hindu Business Line : Nifty may witness a downtrend

LAST week, we had expected the Nifty to begin on firm note. We had indicated that if Nifty sustains the momentum, then it could touch 2890-2900 levels.

In line with our expectations, the Nifty finished on firm a note breaching the psychological 2900-mark.

Expecting a bullish outlook, we had advised investors to consider: a) go long on Nifty futures keeping the stop loss at 2800 (for spot) levels; and b) buy January 2900 calls @ of Rs 33.30.

Both the strategies would have provided profits; while the first strategy could have yielded a return of close to Rs 7,500 considering the futures opening price (on last Monday) of 2820 and the closing price of 2894.95 (on Friday), the latter strategy's profit works out to Rs 1,900 (Rs 53-Rs 34 opening and closing prices respectively).

Outlook: For the ensuing week, we expect the Nifty exhibit a mixed trend with undertone turning slightly bearish.

Sentiment indicators also present a mixed outlook.

If the Nifty sustains at current levels, it might go up to 2930-40 but faces strong resistance at this level.

On the other hand, if it fails to hold on to current levels, it faces a minor support at 2875-85 levels and the major support at 2820-30 levels.

Expecting a possible downtrend, we advice investors to consider shorting Nifty if it (spot) dips below 2895 levels.

Investors may also consider put ratio back-spread strategy. This can be constructed by selling Nifty puts 2900-strike @ Rs 58.70 and buying two 2800-strike puts @ Rs 24.05 thus giving a premium of Rs 10 per contract. While volatility increases helps the position, time decay works against the strategy. If volatility falls or the Nifty remains steady, losses will be the maximum.

However, with the corporate majors set to announce their December quarter performance, the chance of Nifty exhibiting wild swings is bright.

We advice investors to be cautious by placing tight stop-loss to limit their losses.

Volatility view: The implied volatility for both puts and calls declined marginally from previous week levels; calls IV slipped to 19 per cent (21 per cent) and puts IV to 20 per cent (22 per cent). However, IVs swung wildly for both puts and calls ranging from 38-19 per cent.

With puts IV showing wilder swings, the chance of Nifty declining appears bright.

Further, the annualised volatility on Nifty also dipped to 22.36 per cent (24.22 per cent).

Put/call ratio: Open interest put/call ratio moved up to 1.66 from previous week levels of 1.56 while volume-wise PCR decreased to 0.92 (1.14).

The firmness in open interests PCR could be attributed to: a) high level volatile condition that prevailed last week; b) Accumulation on puts open position, particularly on 2850 strike, expecting a downslide on Nifty.

Backwardation: It has widened further during the week. While the Nifty futures closed the week at 2894.95, the Nifty spot ended at 2914, i.e. a discount of about 19 points (16 points). This also paints a negative picture.

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

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