The Hindu Business Line : Nifty, Infosys may turn weak

Critical factors Settlement of August contract to add pressure. Calls IV slipped sharply even as puts IV remained firm. Witnessed higher trading volumes. Improvement in PCR indicates a cautious picture. Rollovers on the lower side.

The Nifty remained positive in line with our expectation. Last week, it gained 0.8 per cent and briefly moved past the 3400 mark. It closed the week at 3385.95 (3356.75) after hitting an intra-week high of 3402.7.

Follow up

Anticipating a positive week, we had advised investors to go long on the Nifty with a trailing stop-loss to maximise profits. Those who had remained long on Nifty would have earned decent profits.

Outlook

However, we expect the Nifty to turn weak this week, as sentiment indicators such as put/call ratio and implied volatilities point towards that.

As has been indicated in this column, the Nifty faces major resistance at 3440; it finds a support at 3360-65 levels. There is a strong possibility of Nifty going towards the resistance zone. On the other hand, if it fails to sustain at current levels and dips below 3328, then the possibility of it slipping to the 3170 level is live.

Recommendation

Anticipating a negative outlook, we recommend investors to consider short positions on the Nifty. As the chance of Nifty opening positively looks bright, investors could consider shorting the Nifty at the day's high level. To maximise profit, investors may settle for a trailing stop loss. Risk-seeking investors could consider shorting Nifty September futures keeping the stop-loss at 3440 and holding the position till the expiry (i.e. September 28).

Risk-averse investors can avoid entering the market this time.

Volatility view

Implied volatilities of puts and calls displayed a divergent trend. While puts IV edged up to 26 per cent against last week's levels of 24 per cent, calls IV slipped to 27 per cent (38 per cent). While the rise in puts IV suggests limited upside, the weakness in calls IV indicates bearishness. Puts IV (at 26 per cent) has now narrowed the gap with calls IV (27 per cent), indicating cautiousness. Annualised volatility on the Nifty also dipped sharply. It currently stands at 29.94 per cent (33.85 per cent) and has been witnessing a declining trend for quite some; this means the chance of sharp volatile condition of the nature seen a few months ago remains rather low.

Put/call ratio

Open interest PCR remained firm at 1.54 (1.58), while volume-wise PCR declined to 0.79 (1.03). The increase in open interest PCR indicates a lot of puts positions added in anticipation of a sharp correction. The decline on volume PCR with a rise in open interest PCR also suggests a negative outlook on the Nifty. Rollover of positions from August to September series is not healthy. While market-wide rollover positions stood at 19 per cent, Nifty saw a higher rollovers at around 23 per cent.

SBI: Last week, we had indicated a negative outlook on SBI. We had given the resistance at 889 and support at 870.

We had suggested investors to go short on SBI if it dips below Rs 870. In that event it could take the counter to Rs 850 levels, we had stated. Quite contrary to our expectation, the counter displayed a strong trend. It closed the week at Rs 905.1.

However, it touched a low of Rs 856 and a high of Rs 924 intra-week.

Infosys (Rs 1,766.7): The outlook appears negative for the counter. It faces a resistance at Rs 1,800-1,810 levels and support at Rs 1,750-1,752 levels. A dip below support level could take the counter to Rs 1,705 or even to Rs 1,648-1,650 levels. Expecting a negative outlook on the counter, we recommend investors to consider shorting Infosys futures. Market lot is 200 units per contract

Securities in ban period

The derivative contracts in the underlying of JP Hydro & Reliance Petroleum that have crossed the 95 per cent of the market-wide position limit on August 1 continue to be in the ban period, according to a NSE statement.

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