The Hindu Business Line : Mixed signals for Nifty

Nifty outlook: The Nifty is looking a little mixed up, with the June contracts is heading for settlement during this week. While the sentiment indicators such as put/call ratio, implied volatility and cost-of-carry present a bearish outlook, the imminent settlement of June contracts may push up the Nifty due to the short-covering, which has been happening quite frequently during settlement weeks.

However, there is a higher chance of Nifty remaining weak during the initial period of the week. The Nifty (spot) finds a support at 2165-70 levels and may test this level.

As the chance of Nifty remaining volatile looks bright (due to the settlement), investors are advised to remain cautious.

Strategy: Investors may either consider shorting the Nifty or buying June 2160 puts @ Rs 14.75. Since the positions may run counter to the primary trend, protective stops are important. More importantly, (as the market is expected to remain volatile during the week) traders are advised to keep their positions open for the next two days only (i.e. maximum till Tuesday).

Volatility view: The implied volatility of puts and calls witnessed a divergent trend. While the puts IV jumped sharply to 18 per cent from the previous week levels of 12 per cent, the calls IV inched down to 15 per cent (16 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks; the firmness in puts IV indicates that traders are betting on the downside of the market. But the relative weakness in calls IV indicates limited upside.

The annualised volatility levels also weakened to 16.39 per cent (18.77 per cent).

Put/call ratio: The volume-wise put/call ratio on Nifty declined sharply to 0.87 (0.97); but on open interest-wise, it rose sharply to 1.53 (1.45). The firmness in open interest of PCR paints a negative picture as traders have kept their long puts positions open in anticipation of a decline in Nifty. The decline in volume-wise put/call ratio was due imminent settlement of the June contracts.

Backwardation: The discount of the Nifty futures remained around the previous week levels; the Nifty June futures now trails the spot by 15.85 points. This is quite huge as only four days are there for the settlement of June contracts. Generally, prices of futures and spot tend to converge when the futures contracts near the settlement period.

The firmness in backwardation in Nifty futures also indicates a negative bias.

Cost-of-carry: It also paints a negative picture by remaining sharply negative.

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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