The Hindu Business Line : Nifty may stay in narrow range

Critical factors
Nifty futures in backwardation despite nearing expiry.
Implied volatility levels remain firm.
Lot of short positions added on Nifty.

As expected, Nifty witnessed heightened intra-day volatility during last week and closed at 3871.15, lower by 17 points compared with previous week's close.

However, the sharp swings during intra-day did not impact the open interest positions. The overall open interest positions increased to Rs 56,147 crore against Rs 52,501 crore.

We had advised investors to adopt a short straddle strategy by selling 3800-January puts and 4000-January calls. Despite the index remaining in our targeted zone, the strategy was not a profitable one.

The undertone on Nifty has turned slightly weak. To regain strength, it has to cross the 3920 mark on a firm footing. On the other hand, a dip below 3790 could rattle Nifty futures.

Also, the January Nifty 3800 puts saw strong accumulation of open interest. This indicates a support around that level. For this week, too, the index may remain range-bound with heightened intra-day volatility.

Risk-averse investors can stay away from the market, as this week will also see the expiry of December month contracts.

Nifty futures will find support at 3795-3800 and resistance at 3920-25 levels. This week may not bring any big opportunity for retail day traders.

Sentiment indicators point a mixed signal.We advise investors to go short on Nifty keeping the stop loss at 3900 level and book even marginal profits.

Rollover

Rollover of open interest positions was also not healthy. Only about 30 per cent of Nifty futures saw rollover of position while for the market as a whole, the rollover is even less at about 22 per cent. This suggests a lack of market interest.

According to market participants, this time a lot of (genuine) short positions were added by institutional players.

This, according to them, could be due to a change in their view on Indian markets or as a hedge against their spot positions.

Put/call ratio

Open interest (OI) put/call ratio declined to 1.23 (1.33) and volume-wise PCR to 1.27 (1.58). The dip in put/call ratio is due to a low level of activity amid volatile condition.

However, OI put/call ratio recovered from mid-week low levels.

Implied volatility

Puts IV and Calls IV remained flat at around 25-26 per cent levels pointing towards another bout of volatile market condition.

Backwardation

Nifty futures is in discount. Despite only three days to go for the expiry of December contracts, the discount has widened sharply. Nifty futures now trail the spot index by good 14.55 points. The discount of January contracts is still wider by about 16 points. This shows that short positions were added on Nifty futures.

Stock follow-up

Reliance Industries: We had presented a negative outlook on the stock. However, contrary to our expectation the stock swung between Rs 1,298 and Rs 1,230. We had advised investors to go short on the counter if the spot price dips below Rs 1,238 and had indicated that it could dip to Rs 1,210-1,200. Though it dipped below Rs 1,238 level, it could not touch our targeted level. We still stand by our outlook.

MTNL: We are bullish on the stock. It finds strong support at the Rs 140 level. We advise investors to go long on the counter keeping a stop loss at Rs 140. A move past current level could take the stock to Rs 150-160 level. Market lot is 1600 units per contract.

FIIs trend

Cumulative FII positions, as a percentage of total gross market position, on the derivative segment as on December 21 rose to 31.46 per cent against per cent against last week Thursday's position of 32.4 per cent. This indicates lack of retail participation.

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