The Hindu Business Line : Nifty future may see weakness this week

As was predicted in this column in recent times, the bull party for Nifty future continued to rock throughout last week. Nifty future closed the week at 5246.5 points against last week’s close of 5125.75, putting in a neat weekly gain over 2.3 percentage on the table. Furthermore, the Nifty future closed at a premium of about 18 points over the Nifty spot, which closed the week at 5228.2. Overall bullish sentiment notwithstanding, the average daily turnover continued to remain moderate at around Rs 34,000 crore. However, the market-wide open interest positions improved to over Rs 65,000 crore.

Follow-up

Last week two strategies had been suggested in this column: 1) Going long on Nifty future, with a stop-loss at 5050 and 2) buying 5100 Nifty call, which was then quoting at around Rs 168. Both the strategies would have generated handsome profits for investors.

Outlook

From hereon, we expect a moderation in the current rally for Nifty future. The rally could lose further steam on nearing 5350 levels, which is a crucial resistance level. A reversal from the 5350 levels, could take the Nifty back to 5050, which forms a key support level. Any further weakness can push the support to 4950, its next support. We feel this bearish undertone may remain as long as Nifty future remains below 5850. Unless there is a breach beyond this level, the likelihood of Nifty future falling back to its January lows looms large. Failing to move past the resistance level may see a sharp and swift slump in the market.

Recommendation:

We present the following strategies for our investors:

1) Consider going short on Nifty future with a stop-loss at 5350.

2) Investors can also consider a long straddle by buying 5300-call and put, which closed on Friday at Rs 95.8 and Rs 149.9 respectively. This strategy can be held till the expiry of May month contracts, as we expect strong break out from current levels.

Straddle is a good strategy to pursue if you think that the price of the underlying will move significantly, but are not as sure about the direction of such a move. By buying both a put and call at 5300 strike price for Nifty in the current market contract, you are betting on a decisive move in Nifty. So, your straddle will make money only when Nifty moves decisively in either direction. Failing which, you will suffer a range of loss, depending on Nifty’s position. So, effectively while the maximum loss in this strategy is only the cost of setting the straddle, the profit potential is unlimited.

Implied volatilities for puts increased to 31 per cent from last week levels of 25 per cent, while calls IV declined to 19 per cent (25 per cent). The increase in put implied volatilities suggests that lot of traders are buying put option as a hedge (or expecting a fall) as the market witnessed steep rise in recent times.

Put/call ratio

Volume wide put/call ratio decreased to 1.15 (1.35), while open interest PCR improved to 1.40 (1.39). While decrease in volume-wide PCR could be due to the low level activity in our markets on Friday, the increase in open interest PCR may signal at an increasingly cautious sentiment. Traders could be keeping their puts positions open as a hedge against their long positions in Nifty future market.

Stock futures

Follow-up

ICICI Bank: We had presented a positive outlook on the stock and advised investors to go long on the counter if it moves past 930. The stock is currently ruling at Rs 935. We still believe that the stock has the potential to move to our targeted level of 1025. Stop-loss should be at 930.

SBI (1822.4): The stock is at crucial stage. While it faces minor resistance at 1840, it finds support at around 1800 levels. A move past 1840 could take it to 1900-1920 levels. Any reversal from 1840, however, could take the stock to 1795 and later to 1675, if it dips below 1795. Investors can go long on SBI future with a stop at 1840, only if it moves past the immediate resistance. The strategy, however, is quite risky and may be best avoided by the risk-averse traders.

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