The Hindu Business Line : Nifty future faces stiff resistance

Critical factors
Steady accumulation in OI positions, particularly for newly included stocks.
Firmness in implied volatilities indicates underlying uncertainty in market.

K.S. Badri Narayanan

The S&P CNX Nifty maintained its momentum last week as it gained one per cent at 4509.5 against the previous week’s 4464. The Nifty future also closed on a firm note at 4477.95 (4429.15).

Last week, 14 new stocks were introduced into the derivative segment, including 3i Infotech, Aptech, Biocon, Havells India, NIIT Technologies, Tech Mahindra and YES Bank.

There was steady accumulation in open interest positions, particularly for the newly-included stocks. Open Interest, which had hit an all-time high of Rs 1,02,077 crore on July 28, improved to Rs 75,966 crore this week from last week’s Rs 64,658 crore.

Turnover remained modest with average daily turnover ruling at about Rs 39,000 crore.

Follow-up

Last week, we advised investors to consider going long on Nifty futures; those who had adopted this strategy would have earned a decent profit. We had also suggested an alternative strategy of buying the 4500 call. For those who had adopted this strategy, the position remains neutral.

Outlook: As long as the Nifty future stays above 4350, there is no threat to the bullish trend. On the other hand, the Nifty future faces stiff resistance at 4520-25. As we mentioned last week, the Nifty future earlier witnessed a tren d reversal when it neared the resistance zone.

Recommendation

We expect the Nifty to begin the week on a negative note as it may be unable to pierce the resistance zone. With implied volatility levels ruling around the 30 per cent mark, one can expect volatile conditions to persist intra-day.

Investors can consider going short on the Nifty future keeping the stop loss at 4520-25 level.

Adjust the stop loss suitably trailing the contract so as to maximise profit. This recommendation is valid only for two days and risk-averse investors can stay away from market as the stop-loss position is far away from current levels.

Implied volatility

Though, implied volatilities decreased vis-À-vis last week, they still rule higher in the region of 30-40 per cent. While the puts IV declined to 25 per cent against last week’s levels of 29 per cent, calls IV dipped marginally to 34 per cent (36 per cent).

The firmness in implied volatilities indicates the underlying uncertainty in the market.

Put/call ratio

Both volume and open interest put call ratios increased; volume PCR moved up to 1.43 (1.38) and open interest PCR to 1.55 (1.45). The increase in open interest positions is mainly due to the addition of fresh short positions, particularly on Friday.

Backwardation

The Nifty futures discount saw wild swings intra-week. The September contract trails the Nifty future by 31.15 points. The discount is as large as 60 points but fell to 8 points during the week.

Stock futures

SBI (Rs 1,620): We had advised investors to long on SBI futures if it moved past the resistance level. We had indicated the support at Rs 1,565 and resistance at Rs 1,630. Though it moved past the Rs 1,630 level and provided some profi t opportunities, it did not achieve our targeted levels of Rs 1,725. Investors can exit from the counter.

Reliance (Rs 1963): The stock is at crucial stage. The stock recently hit its all-time high level. We present a negative outlook on the stock. If it dips below Rs 1,912, it has the potential to hit a low of Rs 1,800 level though it fac es a minor support at Rs 1,875. Consider going short on the counter if it dips below the Rs 1,963 mark.

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

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