The Hindu Business Line : Nifty bull momentum may taper off

The bull run of Nifty was unstoppable this week, as it added another 2.72 per cent and created history by breaching the 4500-mark to touch 4513 before settling at 4504.55. The Nifty future, on the other hand, was close to the historic mark of 4500-mark to reach 4497. It, however, closed at 4483.20.

Smooth accumulation was seen on open interest positions. While the overall open interest position as of Friday improved to Rs 81,767 crore from last week’s Rs 72,073 crore, index futures accounted for close to fifty per cent of it, indicating actions centred around Nifty futures only. Turnover also picked up quite sharply.

Follow-up: Last week, expecting wild swing in one direction, we advised investors to consider straddle strategy by buying into 4350-strike of call and put. The position is in profit zone considering the opening and the closing of optio ns’ prices.

Outlook

As long as Nifty future stays above 4390 mark, there is no threat to bull party. However, a dip below that level, could weaken it to 4355 initially and if the fall is steep, Nifty future may even touch 4240.

Recommendation

Despite strong gain on Friday, the advance/decline was negative signalling that bull is tiring out. We advise investors to consider buying 4400-put. This option is closed at Rs 33.25 on Friday. Besides technical indicators RSI and Bollinger band are also suggesting trend reversal.

Put/call ratio

While open interest put/call ratio moved up to 1.95 against the previous week’s 1.45, volume wise PCR jumped 1.95 (1.45). This indicates a lot of call positions were squared off on Friday when the market sizzled. This also indicates a negative trend as emergence of call writers is quite visible.

Implied volatility

Puts IV jumped quite sharply, while that of calls remained flat. This suggests that a lot of puts positions were added as the market gained strength. With puts commanding a higher premium of 29 per cent as against 13 per cent last week, we expect trend-reversal in Nifty.

Calls IV, however, remained flat at the previous week level of 17 per cent, indicating underlying strength of bull.

Backwardation

The Nifty future widened its discount a bit; it now trails the Nifty by 21.35 points against last week’s difference of 14.6 points. This suggests that a lot of fresh short positions were added expecting a decline.

Stock futures

Infosys (Rs 1,971): Expecting a wild swing on one direction, we advised investors to consider straddle strategy by buying 1950-strikes of calls and puts.

Despite the stock witnessing a sharp fall, it did not reflect in the price trends of calls. For those who had adopted this strategy, the position carries a negative yield.

Hindalco (Rs 174): The stock is at a critical stage. It has support at Rs 171. As long as it stays above that level, it could reach Rs 192, its 52-week high.

However, a dip below the support could weaken it to Rs 154 and possibly even to the Rs 140 level. Expecting the latter, we advise investors to consider shorting the Hindalco future keeping the stop-loss at Rs.171. This stock is prone to wild swings. Those who are willing to take risk can adopt this strategy, as market lot is 1595 units per contract.

FIIs trend

The cumulative FII positions as percentage of total gross market positions on the derivative segment as on July 12 remained at 32.23 per cent (32.60 per cent).

FIIs indulged in alternate bouts of buying and selling last week. However, they have increased their positions to Rs 16,332 crore (Rs 14,224.71 crore) in index futures.

Position-wise, they currently hold 7,33,529 contracts (6,52,001 contracts) of index futures and 8,42,700 contracts (7,73,539 contracts) of stock futures.

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

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