The Hindu Business Line : Stay cautious on Nifty

Critical factors
Nifty futures trade in discount considerably to Nifty
Implied volatility remains firm for both calls, puts above 30 pc
Trading volumes remain modest on account of uncertainty

Though Nifty opened on a lacklustre note, as expected last week, it posted modest recovery after hitting an intra-week low of 3617 on Monday. The NSE's S&P CNX Nifty regained some ground to close at 3752 against previous week's 3821.55.

There was smooth accumulation of open interest positions representing positive sentiment; overall open interest positions moved up to Rs 44,454 crore from Rs 38,919 crore, the lowest in last six months. OI positions touched a high of Rs 68,428 crore during January, after which the market witnessed sharp declines.

We had advised a straddle strategy by 3800-strike puts and calls expecting a sharp break out on one side. Though Nifty began sharply lower, it recovered partially on subsequent days.

Though on a week-on-week basis the position is negative, it provided a profit opportunity on Monday itself, when it slipped sharply. Those who are holding the position can continue to do so till expiry.

Outlook

The possibility of Nifty futures testing resistance levels appears bright this week particularly during the initial stages of the week; Nifty April futures find major resistance at 3950 and support at 3675. However, firm trend in implied volatilities (for both calls and puts) confirms another bout of uncertainty in the market.

It is important to note that the overall market conditions appeared to be skewed in favour of bears as long as Nifty futures rules below 3945-50. With results round the corner for index bellwether Infosys Technologies (on April 13), Nifty futures may trade in cautious zone.

Investors can buy Nifty 3900-call at Rs 26.10 as Nifty may remain positive in the first couple of days. This strategy is valid only for the first two days. Risk-averse investors can stay away from the market.

Put/call ratio

Open interest put/call ratio decreased to 0.86 against previous week's 0.9 while volume-wise increased to 0.96 (0.63).

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

Implied volatility

IV displayed a divergent trend for calls and puts. While puts IV increased to 34 per cent from last week's position of 30 per cent, calls IV decreased to 32 per cent (35 per cent).

The relative firmness in puts implied volatility suggests that a lot of puts were added to hedge against any drastic fall.

Backwardation

Nifty futures swung wildly around Nifty. It now trails Nifty spot by about 30 points as against last week's discount of 21.7 points. This suggests that a lot of short positions were added when Nifty recovered.

Stock futures

Divis Labs (Rs 3,075): We had said that this stock is at crucial stage. While a move past its resistance level Rs 3100-3110 could take it its 52-week high level of around Rs 3540, it faces support at Rs 2931, a dip below this level could take it to Rs 2765-70, we had indicated.

We had advised investors to consider going short on futures if it dips below Rs 3050. However, the stock recovered and is ruling firm. Those who had gone short on this counter could exit from it.

Tata Steel (Rs 489): The outlook appears to be bright for the stock. It finds a resistance at Rs 510-512, and a support at Rs 430; investors can consider going long on the stock, keeping the stop loss at current levels.

The chance of the stock testing its resistance appears bright. Market lot is 675 contracts per unit.

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

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Stay cautious on Nifty