The Hindu Business Line : Nifty future likely to touch 4400 level

Bears continued to dominate the market last week also. The Nifty future shed over 5.2 per cent to end at 4608.2 against its previous week’s close of 4850.1. However, the carnage did not end with this. This time around the fall was accompanied by a notable increase in open interest. Nifty future added about 12.5 per cent in open interest positions, which zoomed to 3.77 crore shares from 3.35 crore shares last week. This is worrisome because an increase in open interest along with a decrease in price suggests a weakening sentiment; it means fresh money is coming into the series, but they essentially are short positions as indicated by the subsequent fall in the market.

The fall was also accompanied by strong volumes, even higher than the volumes post the recent crash in January. The average daily trading volumes were about Rs 43,600 crore last week as against Rs 34,000-35,000 crore range during the previous months. The Nifty Future, as a result of this, has slipped into a 20-point discount over the spot.

Follow-up

The straddle strategy with Nifty 5000-strike price suggested in this column two weeks back, where we reiterated traders to hold on for another week despite it being marginally out of money then, is now in the money. Traders depending on their risk-return expectation can book profits in the spread.

Last week, we had presented two strategies: a) Shorting strangle using 4600 put and 5100 call. This would have resulted in losses since markets fell sharply and b) shorting Nifty future with 5350 stop-loss. This strategy would have generated huge profits.

Outlook

As the Nifty future failed to sustain the crucial support level at 4700, we expect it to touch the next target level of 4400. With each fall, the Nifty future has been creating a new resistance at lower levels. The immediate resistance for Nifty future is placed at 4750. Only a substantive move above that could turn the sentiment positive, albeit over the short-term.

Recommendation:

Consider going short on Nifty future. Keep the stop-loss at 4700. The fall could be sharp and swift, and likewise recovery, if any could also be sharp. So, we advice investors to adjust the stop-loss suitably in line with market movements.

Implied volatility

Implied volatilities for puts improved to 32 per cent against last week’s 27 per cent. Calls IV, in contrast, decreased to 29 per cent (31 per cent). The firmness in put implied volatilities suggests that lot of traders have added put options expecting a further fall in Nifty.

Stock future

Follow-up

Infosys Tech (1962.8)

We had suggested investors to long on Infosys, keeping stop-loss at 1900. The stock hit the recommended target of Rs 2,035.

Cairn India (286.85)

The outlook for the stock is positive. While it finds the support at 260, the stock faces resistance at 340. However, it does face an intermediate minor resistance at 308-310. Investors can go long on the stock keeping the stop loss at 260.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on June 6 was 41.42 per cent. Although FIIs were net sellers on a weekly basis, it may be of interest to know that they were net buyers on Thursday and Friday.

The FIIs now hold index futures worth Rs 20,317.1 crore (Rs 18,944.34 crore) and stock futures worth Rs 18,282.21 crore (Rs 18,509.59 crore).

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