The Hindu Business Line : Nifty future may see a relief rally

The bear onslaught, which became prominent in the second half of the week, spoiled the positive mood with which the market began on Monday. Both Nifty and Nifty futures breached their important technical supports during Friday’s sharp slump. The Nifty October future closed well below the spot Nifty, registering a fall of over 7 per cent during the week. November month Nifty future however was at a premium to spot. It closed at 3087.7 points against Nifty’s close of 3074.35 points. That said, this premium however has dwindled quite sharply when compared with last week on the back of rollover of short positions.

Another interesting fact is that despite the steep fall in the market last week, traders are yet to square off their short positions.

This suggests that they may be expecting a further fall in the markets even from these levels. But since Nifty 3000 and 2900 put options were not available (opened) for trading on Friday, despite sharp fall, traders resorted to heavy shorting using Nifty futures.

Follow-up

1) We had presented two strategies on Nifty: a) Long straddle using 3400 strikes of call and put; and b) Buying December 3500 call (for longer period). While the first strategy currently is in the money, the second strategy, though provided some profit opportunities during intra-week, has witnessed sharp erosion in value.

As advised, we however, suggest traders to continue holding on to December 3500 call, which may earn decent profits once the markets witness relief rally.

2) ICICI Bank: We had advised investors consider long straddle by buying 420 call and put to benefit out of wild swings. Though the stock jumped sharply, the call option did not move as expected. As a result, the strategy has ended sharply in negative.

Outlook

Now that Nifty future has broken all the crucial support levels, its next support appears to be 2600, though it may face a marginal support at 2910 level.

However, if it reverses from current levels, it will face resistance at 3250. A move past this level can take Nifty future to 3450. We feel the market is in a terribly oversold zone and hence expect a sharp bounce back from current levels. If the pull back is really strong, the Nifty future might even touch 3650-3700 levels. However, traders should bear in mind that the rally, if it happens, may be short-lived and swift; and the fall from thereon could be even sharper as has been happening in recent times.

Recommendation:

Retail traders may be better off staying away from markets for two reasons: 1) The market appears set to see sharp swings during intra-day and intra-week trading; 2) SEBI has hiked the margin requirement for trading in the derivative segment from 5 per cent to 10 per cent. Margin requirement in derivative products is calculated on the basis of share price movement, open interest and volatility in options of a particular stock.

However traders, who are willing to take risk, can consider the following strategies:

1) Go long on Nifty future keeping the stop-loss at 2910 if the market opens flat or on negative note. If Nifty future opens on positive note, traders could adjust the stop-loss suitably to cut losses. Book profits, if Nifty future moves past 3350 mark.

2) Buy Nifty December 3500 call, which closed on Friday at around Rs 162 level.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on October16 increased to 37.83 from last week’s 35.79 per cent. This indicates that retail and domestic players have reduced their activity in the market.

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