The Hindu Business Line : Nifty futures may weaken further

Critical factors
Trading activity was rather moderate
After remaining in discount in most part of the week, Nifty futures turned into premium on Friday

After piercing the 4000-point barrier, both Nifty and Nifty futures could not sustain the level. While the latter closed at 3964.7 against the previous week close of 4007.4, Nifty finished at 3962 against 3997.60.

The overall open interest positions surged to Rs 53,537 crore against last week's Rs 44,716 crore.

We had indicated a strong resistance at 4030-35 for Nifty futures and support at 3910-level. In line with our expectation, Nifty futures could not overcome the resistance and turned weak.

We had advised investors to go short on Nifty futures if it dips below 3910. We had also recommended investors to consider buying 3950 puts should Nifty begin the week on positive note.

While Nifty futures did not test the 3910 level, for those who had bought at 3950, the position is in the positive zone. As advised last week, risk-taking investors can hold on to this level as there is a good chance of Nifty dropping.

The bullish undertone still remains as long as Nifty futures stays above 3910-20. However, sentiment indicators such as put/call ratio and other technical indicators such as Bollinger Band and RSI present a mixed outlook. Nifty futures appears to be heading for further correction.

Though the undertone looks bullish, a drop below the support level (3910 points) could weaken Nifty futures sharply.

We advise investors to go short on Nifty futures if it dips below 3950 levels. We advise investors to be cautious and book profits, however, small it may be as Nifty futures recovered sharply on declines in recent times.

Risk-taking investors can hold on to the short position beyond next week adjusting the stop loss suitably. A drop below 3910 could take the futures to 3875-80 initially and then to 3805-10.

Put/call ratio

Open interest put/call ratio declined to 1.40 (1.58) and volume-wise PCR to 0.99 (1.34). This indicates that some put positions have been squared-off by traders when the market slipped sharply on Friday. The drop in volume wise PCR is due to the low level trading activity. (Options side volume suggests 3900-strike added more open positions).

Implied volatility

While puts IV remained at 13 per cent, calls IV inched up to 17 per cent (15 per cent) after touching a high of 24 per cent intra-week.

This indicates chance of higher volatility in the market.

Contango: Nifty futures still maintains its premium against the spot index. Nifty futures, which turned into discount in most part of the week, managed to finish a shade better than Nifty (by about 2 points) on Friday.

Stock follow-up

Reliance Communication (Rs 442): We had presented a negative outlook on the stock. While the support was at Rs 432, if the current momentum maintained the stock could reach Rs 460-465 levels, we had said.

The stock sustained the momentum to hit a high of Rs 468 during intra-week. We had advised investors to short the counter if it dips below Rs 432.

The situation does not arise as the stock stayed above that level. We still stand by our prediction. Consider shorting the futures if it dips below this level.

Polaris Software (Rs 148): This stock gained sharply on Friday. We expect the momentum to continue but may face resistance at higher levels.

We advise investors to go long on the counter on Monday's initial trade itself if it begins on a flat note. The stock could go up to 155-160 levels.

The recommendation is valid for one day. Risk-averse investors can stay away as the market lot is 2800 units.

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