The Hindu Business Line : Nifty may see breakout from range

It was another dull weak in the F&O segment, as volumes dried up despite the fast approaching expiry of February contracts (Volumes tend to rise sharply during the penultimate/expiry weeks due to rollover and squaring-off activities).

The average daily turnover was in the region of Rs 38,500 crore, indicating the nervousness of day-traders. The Nifty Feb future turned extremely weak amidst heightened intra-day volatility. Though market-wide open interest positions improved to Rs 75,588 crore from the previous week’s level of Rs 74,262 crore, they saw huge squaring-off on Friday, when the market tumbled. During the week, open interest positions zoomed to Rs 77,028 crore on Thursday. While the market-wide open interest stood at about 23 per cent, the Nifty future saw a rollover of 26 per cent.

Rollover was healthy in select metal and cement counters.

Outlook: This week, the Nifty might move in a range of 5250-4900, at least in the initial couple of days. As has been predicted, the Nifty is stuck in a broader range of 4700-5300. The long-term resistance still rules at 5850. The sharp fall during week suggests that the Nifty future is still under a bear grip. Interestingly, with each fall, it creates a new resistance zone at a lower level. The immediate resistance for the Nifty future appears to be at around 5200-5250; it faces support around 4950.

A dip below 4900 could take it to 4700 level, where a minor support zone exists and then to 4400-4450 levels. The overall bullish sentiment could revive only once it moves past the 6350 mark with heightened volumes.

Bearish undertones would dominate as long as the Nifty future stays below the 5850 level.

Recommendation

As the Nifty future is making higher bottom and lower top formation so far, any break out on either side will set the short-term direction in the coming days. We advise investors to consider a straddle strategy by buying March 5100-strikes of call and put. They are currently quoting at Rs 256.8 and Rs 290.1 respectively. While the maximum loss could be the premium paid, the profit in this strategy is unlimited, if the Nifty takes a clear direction.

We expect the Nifty to take clear direction next week due to: a) the Budget pronouncement; and b) expiry of February futures.

Risk averse investors can adopt a wait and watch attitude.

Implied volatility

While implied volatility of puts remained firm at 49 per cent (50 per cent), calls IV slipped to 44 per cent (50 per cent). The relative firmness in volatilities means that the market is likely to see another bout of volatile trading. The higher IV for puts suggests that more puts positions were added, indicating the negative bias of the market.

Stock futures

Reliance Capital (Rs 1,904): The outlook on the stock appears negative. While it faces resistance at 2070, the stock dipped below its support level of 1925. The chance of the stock touching its next support level at 1770 appears bright though it faces a minor resistance at Rs 1,850 levels. We advise investors to go short on the counter, keeping the stop loss at 1925 levels.

FII trend

The cumulative FII positions as a percentage of gross market positions on the derivative segment as on February 7 was at 44 per cent. This indicates that still only FIIs are dominating the market in the F&O space. FIIs have remained more or less neutral by indulging in alternate bouts of buying and selling. They now hold index futures worth Rs 27,760.53 crore (Rs 25,541 crore) and stock futures worth Rs 28,750 crore (Rs 27,399 crore).

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