The Hindu Business Line : Limited upside seen in Nifty

Critical factors
Nifty futures trading in premium to Nifty spot
Implied volatility of puts jumped sharply
Trading volumes remained buoyant, particularly on Friday

Nifty was volatile last week it started on a negative note to touch a low of 3841.70 but recovered on Thursday and Friday to close at 4052, against the previous week close of 3983.40. However, the sharp swings did not impact the open interest positions. The open interest positions increased to Rs 57,444 crore, against the previous week of Rs 51,276 crore.

We had said last week that Nifty futures was at critical stage; a move past 4015-20 could take Nifty to new heights while a drop below 3955 could weaken it drastically.

We had advised investors to consider strangle strategy by buying 4100-call and 3900 put. The strategy did provide a gain of over Rs 2,000 during intra-week, when the market slumped. However, on a week-on-week basis, the position will provide a negative return.

The scenario for Nifty appeared to have turned negative considering the sharp rise on Friday. Nifty might open on positive note but faces strong resistance. However, sentiment indicators such as put/call ratio and implied volatility present a mixed signal. While a move past 4075-80 could take Nifty to 4100-level, a fall below 4020 could weaken it.

Expecting a positive beginning for Nifty, we recommend investors to consider going short on Nifty, keeping the stop loss at 4075-80. The stop loss has to be adjusted suitably once Nifty starts weakening so as to maximise profits.

Put/call ratio

Open interest put/call ratio remained firm at 1.63 against the previous week close of 1.64, while volume-wise PCR declined to 1.35 (1.52).

The weakness in volume put/call ratio indicates squaring up activity on the put side, when the market recovered sharply and also shows addition of some fresh long positions.

This paints a rosy outlook of the market.

Implied volatility

Puts IV and Calls IV increased. While puts IV jumped to 26 per cent (21 per cent), calls IV inched up to 24 per cent (23 per cent), indicating the possibility of positive beginning for Nifty.

However, puts IV, which used to be lower than that of calls IV in recent times, is higher by two percentage points, indicating a weak picture.

Backwardation

Nifty futures again moved into premium. Nifty futures, which trailed spot index by about seven points, is now ruling a premium of about six points.

This shows that lot of short positions were squared off.

Stock follow-up

ITC (Rs 165): We presented a negative outlook on the stock and advised investors to shorten the counter keeping the stop loss at Rs 170. Though the stock finished at Rs 172, it did touch a low of Rs 160 thus providing some profit opportunities for investors.

Infosys Technologies (Rs 2,223.4): Outlook appears negative on the stock. We advise investors to go short on the counter. While it finds resistance at Rs 2,275, the stock's support stands at Rs 2,200. A drop below the support can take it Rs 2,150 and might even to Rs 2,090 levels. Stop-loss can be placed at Rs 2,275 and has to be adjusted suitable so as to maximise profits.

Satyam Computer (Rs 496.5): Outlook appears negative for this stock and we also advise investors to go short on the counter. While it finds resistance at Rs 505, the stock's support stands at Rs 485. A drop below the support can take it to Rs 450 levels. Stop-loss can be placed at Rs 505 and has to be adjusted suitably so as to maximise profits.

The cumulative FII positions as percentage of total gross market position on the derivative segment as on January 4 declined to 29.67 per cent against last week Thursday's position of 30.03 per cent.

This indicates increase in retail participation. FIIs were sellers in most days of the week.

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

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