The Hindu Business Line : Weak trend in Nifty

Critical factors
Calls and puts IV still hovers around 40 per cent level.
Trading volume remains weak.
Settlement week could surcharge atmosphere.
Rollover of positions was quite dismal even when the market is plagued with low volumes.

Last week, we had said that the Nifty will remain weak. In line with our expectations, the Nifty tumbled sharply.

Follow up

Expecting a sharp downtrend, we had advised investors to go short on the Nifty if spot dips below 3075 levels. The index dropped 5.7 per cent during the week at 2945 after dipping to an intra-week low of 2919. For those who had gone short on Nifty, the position would have yielded good returns.

Outlook

We still believe that the overall outlook remains bearish. The Nifty (spot) faces initial support at 2840 and then at 2735. However, a dip below 2665-60 could be disastrous as the next support level for the Nifty appears to be around 2335-40.

On the other hand, if the Nifty sustains at current levels and pierces 3055-60, then it could touch a high of 3145.

Expecting a continuation of a downtrend, we advise investors to go short on Nifty if it dips, keeping the stop-loss at the day's high level at the time of entering into a deal. Risk-averse investors can stay away from the market.

With this week being the settlement week, one could expect heightened volatility in the market.

Volatility view

The implied volatility levels are still ruling at higher levels. IVs are currently hovering around 40 per cent-mark.

While puts IV declined to 41 per cent (44 per cent), calls IV slipped to 40 per cent (46 per cent). The volatility levels are quite high because not many are willing to write options. Further, the drop in calls IV is greater than (six percentage points) than that of puts IV (three percentage points).

The annualised volatility on Nifty increased to 50.21 per cent (49.03 per cent) - ruling well above the implied volatility levels (around 10 percentage points) signalling another bout of volatile trading pattern.

Put/call ratio

Open interest put/call ratio declined to 0.77 (1.06) and volume-wise PCR to 0.96 (1.14). The decrease in PCR is mainly due to the low level of activity in the options market.

Stock futures

Reliance Industries: Last week we had projected a negative outlook on this stock. We had indicated that a dip below Rs 1,040 (spot) could take the stock to Rs 990-980 levels. In anticipation of a downtrend, we had advised investors to go short on the counter once it dips below Rs 1,040.

It would have offered windfall profits to those who had gone short on this counter as the stock tumbled around nine per cent. It closed at Rs 967.55 against the previous week's close of Rs 1,050.75. (Market lot is 600 units per contract)

Satyam Computer: The stock closed the week at Rs 687. The technical chart puts the counter at a critical stage. A drop below Rs 650 (spot) could take it to a low of Rs 595-600. On the other hand, if it sustains at current levels, the stock could reach a high of Rs 755.

Investors could adopt any one of the strategies: a) If the spot price crosses above Rs 720-725, consider going long on the stock. Or else; b) Go short if the price dips below Rs 650 level. The resistance (Rs 725) and support levels (Rs 650) are crucial and breaching of these levels could take the sentiment in that direction.

Once again, with settlement of July contract round the corner, we advise investors to be cautious.

FII position: Cumulative FII positions, as percentage of total gross market position in the derivative segment as on July 20 is 35.52 per cent. It appears that they have adopted a well-thought strategy by going long and short (particularly in index futures) against their spot positions. For instance, they were net sellers for about Rs 700 crore while on Thursday they bought about Rs 1,460 crore, thus confusing retail participants on their strategies.

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

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