The Hindu Business Line : Undertone turns positive

Critical factors
Activity might remain low
Historical volatility is quite high against implied volatility levels
Discount widened to 32 points

Last week, we had projected a negative outlook for the Nifty. Contrary to our expectations, the Nifty surged sharply and gained 6.3 per cent. While the Nifty staged a recovery, it touched a low of 2878 (spot) as against an indicated initial support at 2840.

Follow up

Expecting a downtrend, we advised investors to short the Nifty keeping the stop-loss at the day's high level. Though the Nifty surged sharply, for those who had gone short, it did provide profit opportunities during the initial hours of trading on Monday. Since the recovery was quite dramatic and quick, those who failed to book profits might have suffered.

Outlook

Thanks to a sharp recovery last week, the undertone has turned bullish. However, to sustain the bullish momentum, the Nifty faces an initial resistance at 3190-3200. If it is able to pierce these levels, it could go up to 3440-3450.

On the other hand, if the Nifty fails to sustain at current levels, the immediate support in place is at 3020. And a further dip could take the benchmark to 2840 levels.

Anticipating a positive week, we advice investors to consider going long on the Nifty. Though the support level is placed quite wide, we advice investors to keep the stop-loss at the day's low levels at the time of entering into a contract. This is because since the last recovery was quick, the possibility of trend reversal of the same magnitude is not ruled out. To ensure maximum profits, investors can employ a trailing stop-loss.

Volatility view

As the July month contracts expired last week, implied volatility levels on Nifty also saw a sharp slump. This indicates that the Nifty may move in a tight band. While calls IV levels dipped marginally to 39 per cent (40 per cent), puts IV levels slumped to 28 per cent (41 per cent). A few weeks back, IV levels rose to as high as 100 per cent, capturing the volatility in the market. The firmness in calls IV also indicates the bullish undertone of the market.

However, annualised volatility of the Nifty rules well above the IV levels. It currently stands at 46.65 per cent against the previous week level of 50.21 per cent. This indicates the chance of Nifty witnessing wild swings is quite high.

Open interest put/call ratio increased to 0.97, while volume-wise PCR moved up to 1.18 (0.96). The increase in PCR indicates a negative outlook. However, with markets witnessing low volumes, particularly on the options side, we cannot infer much from this indicator.

Satyam Computer: Last week, we had said that this counter is at critical stage. We had indicated that it could go on either side if it breaches the support or resistance levels. We had indicated the support and resistance at Rs 650 and Rs 720-725. We had indicated the price levels at Rs 595-600 at lower side and Rs 750-755.

In line with our expectation, the stock breached the resistance level and touched intra-week high of Rs 749. Those who had gone long on the Nifty would have booked handsome profits.

CNX IT: The undertone for CNXIT index remains bullish; we recommend investors to go long on the counter if the index (spot) crosses 4110. In that event, it could go up to a 4200-4205 levels.

A zoom post 4210 could take the index to new levels. On the other hand, if it fails to sustain at current levels and dips below 4010-15, it could test 3935 levels. Market lot for CNXIT is 50 contracts per lot.

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