The Hindu Business Line : Nifty future likely to see decisive direction soon

Taking most traders by surprise, last week saw an excellent display of resilience in our markets as they bounced back from their previous week’s fall. However, trading volumes continued to remain subdued with a bulk of it coming from the intra-day trades. Average daily turnover stood at Rs 34,250 crore as against the previous week levels of Rs 34,073 crore. Bucking this trend, Friday witnessed a healthy turnover of Rs 41,001 crore - the highest so far this month. This may be due to the build up in trading interest as market participants gear up for Infosys results next week (April 15).

The Nifty April future, which ruled at a premium last week, dipped into a discount. This could have been due to the heavy unwinding of long positions considering the recent rise in market. The overall market wide open interest positions decreased to Rs 49,671 crore against the previous week position of Rs 53,879 crore. While this again suggests a heavy unwinding of long positions, it also points at the low appetite for positional trading among traders.

Follow-up

Last week we had presented three strategies: 1) Going short on Nifty future keeping the stop-loss at 4850; 2) Buying 4500 put; and3) Put/ratio backspread strategy by selling 4900 put and buying two 4600 put options.

The first two strategies remain in the negative currently. Investors can carry forward their positions to next week since we believe that the Nifty might test its January lows of 4450 levels again. However, since we are nearing expiry of the current month contracts, investors holding Nifty 4500 puts can consider exiting them this week, before time value creeps in. As for the third strategy, which is marginally down, investors can continue holding them. We expect them to turn in the money once Nifty starts moving down.

Outlook: Despite last week’s recovery, Nifty future is likely to trade in the bear zone only. While an immediate support exists at 4625 levels, Nifty future may test its crucial support at 4490-95 levels. The immediate resistance for it is at 4850. A move above this level could take it to 5100 levels, which is the next key resistance level.

Recommendation

1) Consider going short on Nifty future keeping the stop-loss at 4850 levels.

2) Investors can consider a straddle strategy by buying 4700 call and put. This strategy is best suited when investors expect wild swing in the index but are not sure of its direction. The Nifty 4700-call closed the week at 161.25 and the put at Rs 90.70. Risk-averse investors, however, can stay away from the market since next week has some of the corporate biggies announcing their quarterly and full year financial performance.

Implied volatilities dipped to around 40 per cent levels. Puts IV declined sharply to 40 per cent (43 per cent), while calls IV to 44 per cent (52 per cent). Low-level activity in the market, particularly in the options segment, could be have been the reason behind the fall in implied volatilities. Volume wide put/call ratio increased to 0.97 (0.76) and open interest PCR to 1.25 (1.11) suggesting that lot of March call positions have been squared off as the market moved up a bit last week. The increase in volume-wide put/call ratio also suggests a possible revival in traders’ interest.

Stock futures

L&T (Rs 2,686): We had advised investors to short L&T if it dipped below 2600. Though it dipped below 2600, it bounced back immediately. We still stand by our recommendation. Investors may consider initiating fresh shorts on the counter if it again breaches the 2600 levels. Following which, L&T may touch a low of 2390 levels. Risk-averse investors are advised to refrain from this strategy since losses, in case of any reversal, can be steep in a plain vanilla shorting strategy.

Reliance Industries (2551.55): Regardless of sharp gain in recent weeks, we believe that the stock is still in a bearish zone. A decisive move above 2858-60 levels only would negate this negative sentiment. The stock faces an immediate resistance at 2585 and has support at 2465. Traders can short Reliance keeping 2585 as stop-loss. Any dip below 2465 can take the stock to 2270 levels.

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