The Hindu Business Line : Nifty future heading for 4250

After beginning on a promising note, the Nifty future succumbed under pressure from the bears and closed a good 3.3 per cent lower than its previous week’s close. It ended the week at 4335.3 points against the previous week’s 4484.3 points close. While the Nifty June future discount to the spot stood at about 20 points, the July series saw a wider discount of over 37 points.

Follow-up

As was predicted last week in this column, the Nifty future recovered mildly on short covering and went on to touch an intra-week high of 4658 before falling prey to profit booking by traders. This would have provided decent profit booking for the traders, though the Nifty future failed to strike our targeted level of 4700 levels.

Outlook

The bears may be here to stay for a while considering that the Nifty future has decisively dipped below its crucial 4400 support level backed by heavy volumes. The support for Nifty future lies at 4250, failing which it will find the next support at 3950. For the outlook to turn bullish, the Nifty future has to move above 4550. Any move above this level may take it to 4750, its next resistance. However, Nifty future will have to move past 5850 levels to negate the overall bearish sentiment. This appears quite unlikely at least in the near future given the many headwinds in our markets.

Consider the following points:

a) Most of the short positions in the June series have either been squared-off or rolled over July month. So the likelihood of recovery due to short covering this week is very little.

b) Another major worry for the market is that the July series is expiring on July 31, which means five full weeks would be available for trading in July contracts. This means there may not be any early short covering as traders who had built fresh short positions in July series would allow the market to reach its nadir (due to time value) to reap the maximum benefits.

c) The Nifty 4200 put has accumulated 9.32 lakh shares in open positions so far. This clearly indicates that traders are expecting Nifty to fall below 4200 points.

d) The Nifty volatility index or India VIX zoomed to 57.85 points intra-day on Friday but ended at 28.19. Though the fall augers well for the market, the fact that it touched 57.85 suggests that a lot of put positions were closed out during the day’s trade itself.

This trend could continue with more traders preferring to stick to day trading.

Consider going short on Nifty July future, keeping the stop loss at 4485. You can hold this position beyond a week to reap maximum profits. Traders can also consider buying Nifty 4300 July put, which is currently trading at Rs 190. Risk-averse traders however should stay away from the market as volatility is expected to peak next week; next week being the settlement week for June series.

Implied volatility

Implied volatilities for puts increased to 33 per cent against last week’s level of 29 per cent, while calls IV decreased to29 per cent (33 per cent). The relative firmness in puts IV is negative for the market, as traders are actively trading in puts.

PCR

Volume wide put/call ratio increased to 1.38 (1.14) but open interest PCR declined to 1.37 (1.6). This indicates puts were squared-off on Friday, when the market slipped sharply on Friday.

Stock future

Reliance Petro (179.15): We had asked investors to go long on RPL future if it moves past 186 levels. Though it touched that level, it did not make any significant movement beyond that level and reverted back to 170 levels, where it finds its crucial support.

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