Down Trend in Nifty Future

Source: Business Line May 11,2008
As we had expected, the Nifty future saw a sharp fall last week. It closed at 4986.7 as against the previous week’s close of 5246.5, shedding a good five per cent in the process. The week also saw Nifty future’s premium over the spot come down sharply. From over 18 points last week, the premium gap has now narrowed to under eight points. The average daily turnover for the week also dipped to Rs 32,657 crore as compared with the previous week’s turnover of Rs 34,000 crore.

However, the overall market wide open interest positions improved to Rs 70,868 crore (Rs 67,581 crore).

Last week, we had presented two strategies: 1) Going short on Nifty future keeping the stop-loss at 5350; and straddle by buying 5300 call an put. Both the strategies would have generated handsome profits for investors.

We had advised investors to carry the second strategy (straddle) till expiry. However, since the straddle spread is in the money now, investors may be better off closing the position on Monday itself.

Outlook


We expect the Nifty future to continue its downtrend next week. While it has an immediate support at 4950, any dip below this level can take it to 4750 levels. On the other hand, any reversal from its immediate support can see the Nifty future bounce back to 5110 levels. As has been mentioned in this column previously, the bearish undertone in the market will continue to remain as long as the Nifty future remains below 5850. Till such time, the probability of Nifty future falling back to its January lows of 4400 level remains high.

Recommendation


We present the following strategies for our investors:

1) Consider going short on Nifty future with a stop-loss at 5050.

2) Investors can also consider buying Nifty 5000 put, which closed the week at Rs 132.5. However, note that these strategies should be closed within two days.

Implied volatility


Implied volatilities for puts remained firm at around 31 per cent, while calls IV increased to 32 per cent (19 per cent). The increase in call implied volatilities suggests that lot of traders have written call, particularly 5200 and 5300 strikes.

Besides, Nifty VIX also jumped 13.7 per cent to 27.53 from last week’s level of 24.21, highlighting the nervous mood of market participants. Typically, a rise in VIX suggests accumulation of puts in expectation of a bearish market condition.

Volume wide put/call ratio increased to 1.18 (1.15) and open interest PCR to 1.36 (1.40). The decrease in open interest PCR suggests that lot of traders would have squared-off their put positions as the Nifty tumbled quite sharply last week.

Stock futures

Follow-up


SBI (1822.4): We had presented a positive outlook on the stock and advised investors to go long on the counter if it moved past 1840 levels. However, the stock failed to breach this resistance zone. However, it touched our targeted support level of 1675 on the downside.

Reliance Industries (2528): The sharp fall with heightened volume on Friday turned the sentiment weak for the stock. The stock faces a strong resistance at 2584, while it finds support at 2400. Any dip below the support would weaken the stock substantially. We remain bearish on the stock. Investors can consider going short on the counter with a stop loss at 2584.

FIIs trend


The cumulative FII position as percentage of total gross market position in the F&O market (as on May 9) was 40.91 per cent. FIIs were mainly net sellers in the derivatives market last week. They now hold index futures worth Rs 19,539.37 crore (Rs 18,936.9 crore) and stock futures worth Rs 20,097.43 crore (Rs 19,386.05 crore).