The Hindu Business Line : Downtrend may continue for Nifty futures

Despite a promising start in the New Year, the stock markets have now tumbled back, wiping away the entire gains of 2009, following the ‘Satyam scandal’.

The Nifty future fell by over 6.25 per cent to end the week at 2863. And in the process, it also turned into discount with respect to the spot Nifty, which ended at 2783. But what’s notable is that this time around, the sharp fall was on the back of high volumes. Though on a weekly basis, open interest positions have shown a marginal improvement for Nifty future, there was a heavy unwinding on Wednesday when market fell sharply.

That the unwinding was restricted to index futures alone, but also across several stock futures suggest that there could be an overall lack of confidence in the trading community.

Follow up

We had presented two strategies for traders last week:

1) Shorting Nifty future with 3150 at stop-loss; and 2) Short straddle strategy using 3000 strikes.

The first strategy would have generated windfall profits for traders.

As for the short straddle strategy, it is currently is in the red, albeit only marginally.

After moving past the 3000-mark quite comfortably the previous week, the Nifty future has slipped way below, confirming it may now be under the firm grip of bears.

As has been mentioned in this column previously, the Nifty future faces crucial resistance at 3250.

Only on breaching this level comfortably, will it be able to reach 3550, its next resistance.

But since the Nifty future has failed to hold above 3150, the possibility of it falling again to its October lows of about 2250 looms large.

Our view is supported by the fact that Nifty futures shed open interest positions during the week.

Further, the emergence of writers for call options at 3100 and 3300 strikes also points that traders may not be sure of a further rally.

Interestingly, 2900 puts also witnessed sharp drop in open interest positions, indicating profit booking by put buyers.

But, since 2700 and 2800 puts saw sharp accumulation in open interest position, it suggests that traders may be switching their positions from 2900 to lower levels.

Besides, that a handful of stock futures are trading at a discount to their spot, also paints a negative picture.

Volatility Index

India VIX or Volatility Index, which had earlier dipped below the 40-point mark, has now bounced back sharply. The index, which measures the expected volatility of Nifty in the near-term, closed at 47.82.

Last week’s Satyam fiasco and the fact that there has been an overall shakeout in investor confidence may explain the high readings on the volatility index.

Recommendation

Consider the following strategies:

1) Since we believe that the market may be under the tight grip of the bears, we suggest traders go short on Nifty future.

The stop-loss can be pegged at 3050. Traders however can adjust the stop-loss suitably.

b) Traders can also consider buying 2800 put, which closed last week at Rs 108.

FII trends

The cumulative FII positions as a percentage of the total gross market position on the derivative segment as on January 7 stood at 31.94 per cent.

Foreign institutional investors were predominantly net sellers during most part of last week.

They now hold index futures worth Rs 7,276.4 crore (Rs 6,532 crore) and stock future worth Rs 10,384.61 crore (Rs 10,705 crore).

Their index options holding improved to Rs 9,96.74 crore (Rs 8,307 crore).

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