The Hindu Business Line : Bullish undertone to sustain

Critical factors
Calls and puts IVs declined
Trading remained active with higher volumes
Nifty futures at a premium to the Nifty
Firmness in PCR indicates a cautious picture

In line with expectations, Nifty scaled a new peak last week and closed sharply higher at 3805, after hitting an intra-week high of 3809.65. Trading was also healthy in both derivative and cash segments.

Outlook

The bullish undertone remains intact as long as Nifty futures rule above 3520. It faces immediate support at 3775-80; the key resistance is at 3875-80.

However, sentiment indicators such as put/call ratio and implied volatility present a mixed picture. Though the undertone looks bullish, a drop below the support level could weaken Nifty sharply. Taking global cues and other momentum indicators into account, we feel that the chance of Nifty turning weak looks stronger.

We advise investors to consider put ratio backspread strategy.

This strategy gives exposure to a falling share price, but also contains losses if the price rises significantly. It is constructed by selling a put with a higher strike price and buying two puts with a lower strike price.

This can be initiated by selling the Nifty 3850 puts at Rs 87.05 and buying two 3750 puts at Rs 53.05. The outgo, which is the maximum loss for the strategy, is Rs 1,905 (Rs 87.05-106.10 multiplied by 100 contracts).

Volatility view

Implied volatilities of puts and calls declined. Puts IV declined to 19 per cent against last week's levels of 26 per cent and calls IV to 16 per cent (22 per cent). Puts IV now rules higher than that of calls IV by three percentage points. Nifty's annualised volatility, which has been declining for sometime, decreased further to 18.67 per cent, indicating some steadiness to the market condition.

Put/call ratio

Open interest put/call ratio increased to 1.49 (1.40) and volume-wise PCR to 1.31 (0.82). This indicates that some put positions have been added by market participants to hedge against any fall.

Nifty futures now rule at a premium against the spot index. Since the introduction of Nifty futures, they have been in backwardation — trailing the spot index — most of the time. Noticeably this time, the premium jumped as high as about 20 points during intra-day trading, but closed with a 9.15-point premium, indicating an overbought position.

Stock futures

Reliance Capital (Rs 589): The outlook for the stock appears positive. It finds support at Rs 589. Go long if the spot price moves past Rs 598. In that event, the stock may reach the Rs 610-615 zone. Risk-averse investors can avoid this strategy, as market lot is 550 units.

GE Shipping (Rs 339): This is another stock that shot into the active trading zone last week. However, the stock could weaken a bit. It finds resistance at 345-350. Consider shorting futures if the spot price dips below Rs 339. It can go up to Rs 325-30 level. Market lot is 1350 units per contract. Retail (or risk-averse) investors can avoid this strategy, as loss could be huge if the stock moves in the opposite direction.

FIIs trend

Last week displayed a mixed trend; they were net buyers on one day and sellers on the other. However, cumulative FII positions, as a percentage of total gross market position on the derivatives segment, as on November 2, decreased to 28.27 per cent.

Securities in ban period

The NSE has suspended the trading in the derivative contracts of IFCI, as it crossed 95 per cent of the market-wide position limit on October 30. NSE advised all clients/ members to decrease their positions in IFCI through offsetting positions. Any increase in open positions shall attract appropriate penal and disciplinary action, NSE has warned.

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