The Hindu Business Line : Nifty may head southwards

Nifty remained cautious for most part of the week but bounced back sharply on Thursday, particularly during the last hour of trading, pushing it to a new high close of 4147 against previous week's 4090.15.

It recorded a trading volume of Rs 53,806 crore on Thursday, the settlement day for January series — the highest in nine months. In April 2006, on the settlement day, the F&O segment saw a record volume of Rs 60,434 crore.

Open interest positions, too, moved up to Rs 68,428 crore against last week's Rs 61,956 crore. However, during intra-week after a steady climb, open interest dipped to a low of Rs 62,251 crore indicating a lot of squaring up activity ahead of settlement.

Expecting a weak trend, we advised investors to consider going short on Nifty futures, if it dips below 4075-80. Though, it hit a low of 4060.35 during intra-week and provided some profit opportunities, the futures contract did not touch the expected level and instead, bounced back sharply.

Despite the strong bounce back, we still stand by our negative outlook for Nifty considering, the sharp rise during the late market hour. Sentiment indicators such as put/call ratio and implied volatility present a mixed signal. Though, there is a chance of Nifty touching a high of 4200 level, a fall below 4075-80 could weaken it to a low of 3985 or even further.

Expecting a weak trend, we advise investors to consider put ratio backspread strategy and hold on to the positions till expiry.

The put ratio backspread gives you exposure to a falling share price, but also keeps your losses small if the share price rises significantly. This can be initiated by selling 4200 puts at the rate of Rs 131 and buying two 3900 puts at the rate of Rs 54.4 each with a net credit of about Rs 2,200 [Rs 131-109 x100 (contract size)]

Put/call ratio

Open interest (OI) put/call ratio dipped to 1.52 against the previous week's 1.78. The firmness in OI put/call ratio indicates that a lot of fresh puts positions were squared off when the market went up sharply on Thursday.

With lot of put positions being squared off, we don't expect the market to move up sharply on the back of short-covering.

Implied volatility:

Puts IV and calls IV remained firm above 20 per cent. While puts IV increased to 26 per cent (24 per cent), calls IV jumped to 29 per cent (24 per cent), indicating a volatile road ahead for Nifty futures. Calls IV now rules higher than that of puts IV by three percentage points, indicating the possibility of further gains.

Backwardation

The near-month Nifty futures, which were trading at a premium for last couple of weeks, again dipped into sharp discount. Nifty February futures are now trailing the spot Nifty by about 17 points. This indicates that lot of short positions were added, when the market sizzled in late Thursday trading, expecting a sharp pull back in value.

Stock follow-up

Titan Industries (Rs 943): We had said that this counter was at critical stage. While a move past 940 could take it to Rs 1,000-mark and a dip below Rs 908 could weaken it to a level of Rs 850, we had indicated last week. Our view has not changed as the counter swung only between the resistance and support levels. Reiterating our positive outlook, we advise investors to go long on the counter, keeping the stop loss at Rs 936 once it moves past 945-950 level. This is a risky strategy, as the stock could swing wildly and also the market lot is 411 units per contract.

FIIs trend

Cumulative FII positions, as a percentage of total gross market position, on the derivative segment as on January 24 increased to 31.50 per cent against last Thursday's position of 30.81 per cent. This indicates decrease in retail participation. FIIs were net sellers (though mildly) on most days of the week.

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

More Stories on : Derivatives Markets | Stock Markets | F & O Outlook

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page