The Hindu Business Line : Positive drift in Nifty likely

Critical factors
Calls and puts IV stayed in a range (higher).
Trading volume still on lower side.
Settlement week to increase volatility levels.

We had, last week, said that Nifty might see a volatile trend. In line with our expectation, the benchmark moved wildly but recovered sharply to close above the psychological 3000-mark levels.

Follow up

Anticipating a volatile trend and unsure of market direction, we had advised investors to consider strangle strategy by buying 3200-call @ of Rs 16.45 and 2700-puts @ of Rs 41.75. Though the Nifty bounced back vigorously, due to lack of time-value the positions ended sharply lower.

Outlook

With the strong recovery on Friday and Thursday, we expect the Nifty to maintain a positive momentum in this relief rally. A move past 3065 levels could take the Nifty to 3110 levels. It faces initial resistance at 3110-3115 levels and another at 3270 levels.

However, a drop below 2935 could change the whole scenario once again. In that event, the Nifty faces the initial support at 2855 and then at 2615.

The overall trend remains bearish. To ensure the return of bull phase, the Nifty has to cross the crucial 3315-3320 resistance levels. A dip below 2750 level could turn the market into strong bearish zone and could even take the Nifty to 2310 levels.

As this week is the settlement week for June contracts, we advice investors to tread with caution.

Recommendation

As we expect a positive beginning for the Nifty, we advice investors to go long on the Nifty futures. This being the settlement week, we advice investors to adopt strict stop-loss mechanism. The stop-loss could be day's high level at the time of entering into a contract. Note that this recommendation is valid only for Monday and Tuesday.

Volatility view

The implied volatility levels are still ruling very high. While puts IV remained firm at 56 per cent (57 per cent), calls IV, which was ruling well over 100-per cent mark during a couple of weeks back, inched down to 52 per cent (59 per cent). The volatility levels are quite high because not many are willing to write options.

The annualised volatility on Nifty also remained firm at 62.65 per cent (68.79 per cent) - ruling well above the implied volatility levels signalling another bout of volatile trading.

Stock futures

IVRCL Infra: We had given a negative outlook on IVRCL. Quite contrary to our expectation, the stock surged strongly. We had advised investors to go short on the counter if it (spot) dips below Rs 195 mark. However, the situation did not arise, as the stock witnessed a smart turnaround.

Hindustan Lever: This is another stock that is at crucial levels. While a move past Rs 235-240 levels could take the stock to higher 250-255, a dip below 196 could pull it to 175-185 levels. Investors may consider going short on Hindustan Lever, if it dips below 195 (spot price) levels. Since the market lot is 2000 contracts, we advice investors to trade cautiously.

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

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