The Hindu Business Line : Nifty future rules near critical support

Due to the sharp fall on Monday, the Nifty ended the three-day week down by 3.62 per cent. The Nifty March future closed at 4572.70 against the spot price close of 4573.95, while the Nifty April future closed with a wider discount at 4552.90.

Trading volumes remained moderate. Market wide open interest positions dipped to Rs 64,096 crore. While the market wide rollover of open interest positions stood at a moderate 17-19 per cent, the Nifty future saw a rollover of about 20 per cent.

Outlook: We expect the downtrend to continue for the Nifty as it breaches key support levels. The immediate support for the Nifty future is at 4490-95 level. This level is very crucial as a dip below this could weaken the Nifty future to 4350 and next to 4200-25 levels. If it finds support at this level, the index future could bounce back to touch its resistance of 4850. A move above the resistance could take it to 5100, which is quite unlikely to happen in the near future.

It may be noted that the bearish trend exists as long as the Nifty future stays below 5850 level. Only a move above this level could negate the overall negative view of the market.

This being the settlement week for March month contracts, we expect the Nifty to witness volatile trading.

Investors can consider the following:

As we expect the sentiment to weaken further, we advise investors to go short on the Nifty future keeping the stop-loss at 4650. While the Nifty future may slip at opening it may move sideways from there.

Another strategy to be considered is the straddle - by buying 4500-April strikes of call and put. Straddles are a good strategy to pursue if one believes that a stock or index’s price will move significantly, but is unsure as to which direction. The stock price must move significantly if the investor is to make a profit. While the 4500-April call is quoting at Rs 251.70, the put is ended the week at Rs 199.60. Risk averse investors can consider this strategy as the maximum loss could be the premium paid.

Implied volatility

Implied volatilities displayed a divergent trend. While puts IV inched up to 47 per cent (45 per cent), calls IV declined to 48 per cent (55 per cent). This means that several call writers have squared-off their positions and a few have added put positions. The relative firmness in volatilities means market is likely to see another bout of volatile trading conditions.

Put/call ratio

Volume wide put/call ratio declined to 0.70 (0.78) and open interest PCR to 0.85 (0.97) suggesting that lot of puts positions have been squared-off when the market crashed sharply. The drop in volume-wide put/call ratio suggests a low level participation from market players.

Bank futures

The outlook for Bank Nifty futures appears negative, as long as it stays below 6938-40 level. Traders may consider going short on the Bank Nifty futures keeping the stop-loss at 6519. The possibility of the Bank Nifty future touching its support is bright. The support level for Bank Nifty future is placed at 6207-10.

Stock futures

Larsen & Toubro (Rs 2,841)

Despite the recent recovery, we still believe that the outlook for the stock is negative. While it faces a resistance at 2905, the stock finds its support at 2824. A dip below support level could weaken its 2605-2595 levels. Investors who are willing to take risk can consider going short on the counter once it dips below 2824.

FII trends

The cumulative FII positions as a percentage of gross market positions on the derivative segment as on March 19 was at 43.43 per cent. FIIs have remained more or less neutral by engaging in alternate bout of buying and selling. They now hold index futures worth Rs 23,647 crore (Rs 26,000 crore) and stock futures worth Rs 21,411 crore (Rs 22,928 crore). This indicates that they created fresh short positions in the F&O space.

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