The Hindu Business Line : Nifty may show weakness

Contrary to expectations, the record-breaking run continued last week as well on the back of no-negative-surprises Budget with the Nifty scaling to a new peak of 3167.20.

Follow-up

Expecting a weak trend we had advised investors to consider shorting Nifty futures, if the Nifty (spot) dips below 3040 levels.

However, the Nifty did not touch that levels.

We had also advised investors to consider buying Nifty 2950 puts at Rs 49.70 as an alternative. Those who had bought the puts could continue to hold them.

Outlook

We expect the Nifty to witness a downward trend this week, as sentiment indicators such as put/call ratio, implied volatility and cost of carry point to a negative bias.

If the Nifty opens on a positive note and breaches 3170 level, it could raise to newer peaks.

On the other hand, if it fails to sustain at current levels, a dip below 3120 could take the Nifty to 3060-3040 levels.

Strategy

Go short on Nifty futures if the Nifty spot dips below 3120 levels with a stop-loss at the day's high at the time of entering into a deal; the stop-loss can be adjusted further down progressively should the Nifty fall further to maximise profits. Investors may also consider buying the Nifty 3050 puts at Rs 35.90. Investors could exhibit a cautious trading strategy by following strict stop-loss mechanism, as the markets may witness a high degree of volatility.

The implied volatility for puts declined to 21 per cent against last week's level of 23 per cent, while calls IV declined a tad to 16 per cent (17 per cent).

Puts IV, which declined, still remains above the calls IV painting a negative picture. Also, the drop in calls IV suggests limited upside. With the annualised volatility on Nifty declining to 17.01 per cent (18.09 per cent), below the implied volatility levels of puts, we can expect a downward trend for Nifty.

Put/call ratio

Open interest put/call ratio increased to 1.64 (1.53), while volume-wise PCR increased to 1.38 (1.29). The increase PCR levels indicates quite a few squaring up of activity took place on the calls side when the market surged strongly last week.

Further, the rise in open positions suggests that lot of puts positions were added expecting a drastic fall on Nifty.

While the Nifty March futures closed the week at 3137.6, the Nifty spot ended at 3147.35; i.e. a discount of about 9.75 points (4.40 points). This also points to the possibility of a weak trend.

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

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