The Hindu Business Line : Momentum set to continue

Critical factors
Calls and puts IV still ruling above 50 per cent.
Trading volume still on lower side.
Rollover of positions was abysmally low.

We had indicated a possible relief rally amidst volatile conditions for the Nifty last week. The Nifty moved in line with our expectations and closed at 3128 with handsome gains.

Follow up

Expecting a positive outbreak on the Nifty, we had advised investors to go long. Though it ended strongly on a week-on-week basis, it remained relatively weak on the first four days of the trading week. It would, therefore, have not been profitable for those who had gone long on Nifty June futures, which expired on Thursday.

Outlook

With the strong recovery on Friday, we expect the Nifty to maintain a positive momentum in the form of relief rally. A move past 3205 could see the Nifty move to 3510. It faces initial resistance at the 3175-3185 level.

However, a drop below the 2990-3000 level could change the scenario once again. In that event, the Nifty could test the 2745-50 range and may even drop to the 2490-95 level.

The overall trend remains still bearish. To ensure return of the bull phase, the Nifty has to cross the crucial resistance at 3315-3320. The Nifty witnessed only low rollover of 61 per cent; the overall market rollover stands at 62 per cent.

Considering the reduced volumes of late, the rollover is quite insignificant. When the market was in the bull zone, about 80-85 per cent of positions used to be carried over.

Recommendation

As we expect a positive trend for the Nifty, we would recommend investors to go long on Nifty futures. The stop-loss could be day's high at the time of entering into a contract. To minimise risk, investors can also consider buying Nifty 2800 put @ Rs 32.55

The implied volatility (IV) levels are still ruling high. Puts IV are still ruling higher but declined marginally at 53 per cent (56 per cent), while IV of calls, which was ruling well over 100-per cent mark a couple of weeks ago, moved up to 56 per cent (52 per cent). Volatility levels are quite high because of investor unwillingness to write options.

The annualised volatility on the Nifty also remained firm at 57.88 per cent (62.65 per cent), though a level higher than implied volatility levels signals another bout of volatile trading.

Open interest put/call ratio remained flat at increased to 0.97 (0.97) and volume-wise PCR at 0.81 (0.82), indicating lack of activity.

Stock futures

Hindustan Lever: We had said that while a move past the Rs 235-240 range could take the stock to Rs 250-255, and a drop below Rs 196 could pull it down to the Rs 175-185 range. The latter being our preferred view, we advised investors to consider shorting HLL if it dips below the Rs 195 mark. However, the situation did not arise and the stock witnessed a smart turnaround.

SBI: Despite a marginal recovery, the outlook for SBI remains negative. Investors may consider shorting SBI. A dip below Rs 700 could take the stock to sub-Rs 600 levels. Market lot is 500 units per contract.

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