The Hindu Business Line : Volatile condition may prevail

Last week was the most eventful for the Indian markets, as they witnessed sharp correction but recouped most of the losses in the last two days of trading. Nifty, which touched an intra-week low of 3657.65, recovered to 3888.65 against the previous week close of 3962.

The sharp swing had its impact on the open interest positions too; overall open interest positions dipped to a low of Rs 48,692 crore during the week, but thanks to a recovery, they regained Rs 52,501 crore against the previous position of Rs 53,537 crore.

We had advised investors to go short on Nifty futures if it dips below 3910-20 levels. We had also advised investors to hold on to the 3950 puts (which was recommended in the previous week). Both the strategies would have yielded windfall profits as Nifty futures index slumped even below our targeted level of 3805-10.

Nifty futures is at crucial level. To enter the positive orbit on firm footing, it has to cross the 3950-mark. On the other hand, a dip below 3810 could shake Nifty futures once again.

Also, January Nifty 3850 and 3700 strikes witnessed heightened activity on the puts side besides 3800 and 3900 strikes. On the call side, only January 4000-strike evoked some response. This indicates a mid-term downward bias for Nifty futures with strong resistance at 4000-level.

For this week, the index may remain range-bound with heightened intra-day volatility.

Risk-averse investors can stay away from the market. Others may consider shortening the straddle. This can be initiated by selling 3800-puts (January) at Rs 102.85 and 4000-call at Rs 79.90. Caution: this strategy is risky. If the indices move beyond these levels (3800 & 4000), loss could explode. Profit is, however, limited to the premium collected. Consider this strategy only for at the most of two days.

Put/call ratio

Open interest (OI) put/call ratio jumped to 1.33 (1.40) and volume-wise PCR to 1.58 (0.99). OI positions dipped to 1.2 when market slumped on Tuesday indicating lot of squaring-up activity. The increase in OI position from low level indicates some hedging despite strong recovery by the market.

Implied volatility

Puts IV and Calls IV jumped to 25 per cent (13 per cent) and 26 per cent (17 per cent), respectively. This indicates chance of higher volatile condition in the market.

Discount: Nifty futures, which turned into premium for sometime, turned into discount zone again. It now trails Nifty spot index by close to 18 points, indicating that fresh short positions were added when the market recovered on Friday.

Stock follow-up

Reliance Communications/Polaris Software: Reliance Communications (recommended previous week) achieved our targeted levels and bounced back from that level. Those who had gone short on the counter would have made sharp profits.

We had given recommendation for only one day on Polaris Software. In line with our recommendation, it opened flat but closed at higher levels thus providing some profit opportunities.

Reliance Industries (Rs 1,254): Outlook appears negative for the stock. It faces a strong support at Rs 1,238. If it dips below that level the stock could turn weak and face mild support at Rs 1,210-1,200. Investors could consider shorting the stock if it dips below the support level. Risk-averse investors can stay from this, as the market lot is 300 units per contract.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on December 7 rose to 32.4 per cent against last week Thursday's position of 29.53 per cent. This indicates that lot of retail investors squared-off their positions when market slumped and did not turn back to the market even when it recovered.

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