The Hindu Business Line : Bullish trend in Nifty likely

Critical factors
Calls IV dipped sharply vis-à-vis puts IV
Trading remains active with higher volumes
Firmness in PCR indicates a cautious picture

Even though Nifty saw intra-day volatile conditions, it gained sharply week-on-week basis by edging up 1.84 per cent. It closed the week at 3588.4 against the previous week close of 3544 amid active trading.

Follow-up

Last week, we had indicated volatile trading. We had indicated support at 3390 and resistance at 3526 levels. We indicated the resistance at 3635-3640 and support at 3510-15 levels.

We advised investors to go short on Nifty, if it goes below 3510. The situation, however, did not arise as the index failed to test the indicated level.

As long as the index stays above 3520, the uptrend may continue. However, sentiment indicators such as put/call ratio and implied volatility presented mixed indications.

The resistance level appears to be in the range of 3635-3640, which the Nifty might be able to test this week.

The support levels are at 3510-15. Though the undertone looks bright, a drop below these levels can weaken the Nifty quite sharply.

Risk-averse investors can stay away from this kind of market. We recommend investors to go long on Nifty (October contracts) keeping the stop-loss at 3520. Since the market could swing violently, we advise investors to book profits, however, small the profits are.

Volatility view

Implied volatilities of puts and calls displayed a divergent trend. While puts IV remained firm at 23 per cent against last week levels of 22 per cent, calls IV slipped sharply to 14 per cent (40 per cent). Puts IV, which remained low vis-à-vis calls IV for quite sometime, is sharply higher (at 23 per cent) than calls IV (at 14 per cent).

As the market surged sharply last week, it seems, a lot of investors booked their profits around the expiry of September contracts. With the puts IV gaining upper hand, the chance of Nifty declining is not ruled out. Annualised volatility on Nifty dipped to 23.05 per cent (25.67 per cent) indicating a soft trend ahead.

Put/call ratio

Open interest put/call ratio dipped to 1.49 (1.62) while volume-wise PCR jumped to 1.24 (1.02). This also indicates that a lot of calls positions have been squared up around the expiry time as the index surged sharply. Volume PCR jumped as lot of puts position has been rolled over on expectation of soft trend on the Nifty.

Tata Motors (Rs 836): Last week, we had indicated that the outlook for the stock appears to be negative. While it finds resistance at Rs 850 level, a dip below its support level at Rs 829/830 could take the stock to Rs 805 and may even go down to Rs 745. We had recommended investors consider shorting the counter if it dips below the support level. However, the stock did not test this level. We stand by our recommendation and recommend investors to go short on if it dips below Rs 830 level.

Satyam Computer (Rs 818): The outlook appears to be negative. The stock finds resistance at Rs 830 and support at Rs 810. While a move past the resistance level could take the stock to Rs 860 levels, a dip below the support level may take it to Rs 790 and even to Rs 775. We recommend that investors can consider shorting the futures if it dips below Rs 810.

FIIs trend

FIIs were net buyers in most part of the week in derivative segment. Cumulative FII positions as percentage of total gross market position in the derivative segment as on September 28 increased to 33.69 per cent against last Thursday's position of 29.45 per cent. This indicates that only foreign institutional investors have carried over their position from September contracts to October series.Those who entered, other than FIIs (mainly retail investors), seemed to have closed out their position prior to expiry or allowed the September contracts to expire.

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