The Hindu Business Line : Nifty may resume negative journey

Critical factors
Nifty futures swung wildly but ended in sharp discount
IV remains firm for both calls and puts
Moderate trading volumes

After opening on a turbulent note, the market recovered part of its losses last week. After hitting intra-week low of 3785.30, the NSE's S&P CNX Nifty regained to close at 3821.55 against the previous week's 3861.05.

Open interest positions did not see much rollovers; the current open interest positions of Rs 38,919 crore is the lowest in last six months. Last week, the open interest positions stood at Rs 59,162 crore and touched intra-week high of Rs 63,784 crore.

It may be recalled that open interest positions touched a high of Rs 68,428 crore during January, after which the has market witnessed sharp declines. The lack of carryover positions is due to heightened volatile condition in the market.

Expecting a sharp break out on one side, we advised investors to consider straddle strategy by buying 3900-strike of call and put. For those who employed this strategy, the positions would have yielded a decent profit.

Outlook

Nifty futures are at a critical stage. While a move past 3950 could take it to 4145-4150, a drop below 3760-65 could weaken Nifty to a low of 3585. Besides, a firm trend in implied volatilities (for both calls and puts) also confirm likely volatility in the market.

It is important to note that the overall market condition appears to be skewed in favour of bears as long as Nifty futures rules below 3945-50. With the RBI announcing a hike in cash reserve ratio for banks, the chance of Nifty touching the support appears bright.

Like last week, the same strategy can be considered. Initiate straddle strategy by buying 3800-strike call and put. A straddle provides the opportunity to profit from a prediction about the future volatility of the market.

Long straddles are used to profit from high volatility. Long straddles can be effective when an investor is confident that a stock price will change dramatically, but cannot predict the direction of the move.

This strategy could cost investor about Rs 10,550 considering the closing price on Friday. Risk-averse investors could stay away from the market.

Put/call ratio

Open interest put/call ratio decreased to 0.9 against the previous week's 1.04 while volume wise PCR also dipped to 0.63 (1.05).

This indicates a lack of participation by traders, as they are unsure of market direction.

Implied volatility

IV declined for both calls and puts. While puts IV declined to 30 per cent from last week position of 34 per cent, calls IV increased to 35 per cent (37 per cent). The relative firmness in call-implied volatility suggests that lot of call writes are expecting a sharp fall in market.

Backwardation

Nifty futures swung wildly around Nifty. It now trades at a sharp discount to Nifty spot by about 21.7 points, as against last week's premium of 8.35 points. This suggests that lot of short positions were added in expectation of a fall in Nifty.

Infosys (Rs 2,012)

We had presented a negative outlook on the stock and had indicated resistance at Rs 2,120-25 and a support at Rs 2,010-20. Those who had gone short on the counter, as suggested would have earned profits as the stock dipped below support levels.

Those who had not squared-off the position could continue to hold the position as the chance of the stock touching our expected level Rs 1,800-1,780 appear bright.

Divis Lab (Rs 3,075): The stock is at crucial stage. While a move past its resistance level of Rs 3,100-3,110 could take it to its 52-week high of around 3540, it faces support at Rs 2,931, a dip below which could take it to Rs 2,765-70.

The stock may open on strong/stable note and may turn weaker later. Consider going short on futures if it dips below Rs 3,050. In that event, it can test the support and may even go to Rs 2,765-70.

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

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