The Hindu Business Line : Heightened intra-day volatility in Nifty likely

Critical factors
Open interest crossed Rs 90,000-cr mark for first time
Nifty backwardation remained firm
Implied volatility decreased for puts options

K.S. Badri Narayanan

The Nifty index continued its bull run last week, as it added another 1.36 per cent. In turn, it created history breaching the 4600-mark registering 4600.80 before settling at 4566.05. The Nifty future, which closed at 4544.75, also gained 1.37 per cent against the previous week’s 4483.20.

Fresh accumulation as well as smooth rollover saw open interest positions jumping to Rs 90,505 crore against the previous week’s Rs 81,767 crore.

Follow-up: Last week, we had expected the Nifty future to decline a bit and recommended buying 4400 put options. Though the position gave some profit opportunity in intra-week, it turned neutral by the end of the week.

Outlook

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

Recommendation

Being the settlement week for July contracts, there could be volatile trading, particularly intra-day. So risk-averse investors can stay away from the market. We advise investors to go long on Nifty future, keeping stop loss at 4390.

Since the stop-loss is wide from current levels, this recommendation is only for those who are willing take that risk. As we expect high swings during intra-day, we advise investors to consider booking profits, however small the proportion.

Put/call ratio

Put/call ratios remained firm at around the previous week’s levels. While OI put/call ratio stands at 1.72 (1.62), volume wise PCR dipped slightly to 1.93 (1.95).

Implied volatility

Puts IV weakened quite sharply, while that of calls remained flat. This suggests that a lot of puts positions were squared-off as the market gained strength on each passing day. Puts IV now stands at 13 per cent (29 per cent), while calls IV remained flat at the previous week’s level of 17 per cent, indicating the bulls’ strength.

Backwardation

The Nifty futures discount remained at around previous week’s level of about 21points. The discount, which narrowed down considerably, particularly on Friday, again widened during the closing hours of trading. This suggests that fresh short positions were added expecting a downfall. The discount gap is high considering only four days are left for the settlement of July contracts.

Stock futures

Hindalco (Rs 174): We had said that the stock is at critical stage and could swing in one direction. We had indicated a support at Rs 171 and resistance at Rs 192. We advised investors to consider shorting the future. Though it tested the resistance, it did not fall as expected. The position currently is marginally down. Those who had gone short on Hindalco could continue to hold.

Tata Steel (Rs 715): This stock is also in a critical stage. We expect the stock to open on firm note. However, we are expecting a trend reversal and that could be quite sharp. We advise investors to allow to gain and go short on the c ounter, once it dips below Rs 717. In that event, it could test its support level of 645-50.

The cumulative FII positions as percentage of total gross market positions in the derivative segment as on July 19 remained 32.80 per cent (32.20 per c- Bloombergent).

FIIs indulged in alternate bouts of buying and selling last week. However, they have increased their position to Rs 18,349 crore (Rs 16,332 crore) in index futures and to Rs 28,157 crore (Rs 25,823.33) on stock futures. Position-wise, they currently hold 8,06,739 contracts (7,33,529 contracts) of index futures and 9,09,104 contracts (8,42,700 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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