The Hindu Business Line : Nifty future faces stiff resistance

As expected, the Nifty spot as well as the January future maintained their bullish momentum and scored significant gains last week. While the Nifty January future gained 2.35 per cent, the Nifty spot index jumped 3.25 per cent. The Nifty January future, which was ruling at a healthy premium, last week moved into discount on account of heavy short positions. It now trails the Nifty spot by 10.15 points. According to market sources, institutions have accumulated index heavyweight stocks in the spot market and went short on the index futures to hedge their positions.

Follow-up

Last week, we had advised investors to go long on the Nifty future, while keeping the stop-loss at 5990 level. We had also presented another strategy – buying the Nifty 6100 call. Both these strategies would have resulted in handsome profits.

Outlook

The undertone still remains bullish. However, the Nifty January future might face severe resistance this week as it entered the overbought zone and may weaken sharply. While it faces minor support at 6190, a dip below that level could take it to 6045 initially and even to 5850 levels later. The Nifty January future faces strong resistance at 6300.

Recommendation

The probability of the Nifty future dipping below 6000 appears high this week. We advise investors to go short on Nifty futures, keeping the stop-loss at 6300. Alternatively, investors could also consider buying Nifty 6100-call which is ruling at Rs 161.05. While the maximum loss in this strategy could be the premium paid, the potential for gain is unlimited.

Implied volatility

Implied volatility (IV) of puts and calls rose from the previous week’s levels. While puts IV increased to 30 per cent (24 per cent), calls IV rose to 30 per cent (26 per cent). The jump in volatility indicates that market might witness volatile trading patterns.

Put/call ratio

While volume-wide PCR increased to 1.40 (1.27), open interest wide PCR decreased to 1.48 against last week’s levels of 1.55. This suggests that several puts positions were squared-off on Friday, even as the markets rose quite sharply.

Stock futures

Sesa Goa (Rs 3,796.7): Expecting a positive break-out in the stock, we had advised investors to go long on the Sesa Goa January future. For those who had adopted our strategy, the position would have been profitable, as the stock hit our target price.

NTPC (Rs 271.45): The stock is meeting with strong resistance at Rs 278 and finds support at 245. After hitting the resistance last week, the stock turned weak on Friday. We expect the negative trend to continue and this might take the stock to its support. We advise investors to consider shorting NTPC while keeping the stop-loss at Rs 280. Risk-averse investors could avoid this strategy, as the market lot is 1625 units per contract.

Infosys (Rs 1694.1): With an impending earnings announcement on January 11, Infosys may adopt a clear direction, either on the positive or negative side this week. Investors can consider a straddle strategy on Infosys, by buying the 1710-strike. While 1710 call is quoting at 91.4, the put is quoting at 93.5. The maximum loss in this strategy would be the premium paid, while the profit is unlimited. The profit would be higher if the stock price moves swiftly in one direction.

FIIs trend

Cumulative FII positions as a percentage of gross market positions on the derivative segment as on January 3 were 36.43 per cent (39.26 per cent on December 27).

FIIs continued their selling last week as well in the F&O segment, particularly in stock futures. However, they remained net buyers in index options, suggesting that they expect volatile conditions to be in force. They now hold index futures worth Rs 21,722.35 crore (Rs 20,812.38 crore) and stock futures worth Rs 52,615.36 crore (Rs 49,220.34 crore). This indicates that they have added fresh short positions on index as well as stock futures.

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