The Hindu Business Line : Weak outlook for Nifty

Nifty outlook: Last week, we had expected the Nifty to remain in the 2240-2160 range and said if it crossed the 2240 barrier, it could surge to 2280 levels on the upper side, and to 2150-35 levels on the lower side if it dips below 2160. We advised investors to short strangle - 2240 calls @ Rs 19.90 and 2160 puts @ Rs 19.80 expecting the Nifty to remain in that range. But the Nifty gained sharply and was able to break the 2240 level. However, the position would have generated profits during intra-week; on Thursday, the calls closed at Rs 14.85 and the puts at Rs 5.05. The puts and calls opened at Rs 11 and Rs 16.05 respectively last Monday.

For the ensuing week, the upside for the Nifty seems limited as sentiment indicators such as put/call ratio, implied volatility and cost-of-carry point a rather weak outlook. While the Nifty (spot) may find support at 2230 levels, the resistance is at the 2280-85 level. On the contrary, if the Nifty crosses the 2280 level, it could go up to 2295-2300 levels.

Strategy: Considering the resistance at 2280, investors may consider shorting the Nifty futures keeping the stop-loss at Monday's high level or at 2280 level (on spot) at the time of entering into a deal. We would advise investors to cover their positions considering the settlement on Thursday for July contracts. Usually, settlement weeks witness sharp jump in prices. So, traders are advised caution and trade with strict stop-loss positions.

Volatility view: The implied volatility of puts and calls declined; the puts IV decreased to 16 per cent from the last week level of 19 per cent and the calls IV to 15 per cent (19 per cent). The decline in implied volatilities indicates a mixed trend, as traders are not willing to bet on either side of the market. The annualised volatility also remained flat at 20.40 per cent from previous week's 20.92 per cent.

Put/call ratio: Put/call ratio depicts a mixed picture. While the volume-wise put/call ratio on Nifty declined marginally to 0.86 (0.99), the open interest PCR jumped to 1.89 (1.62). The jump in OI put/call ratio indicates that there has been a large activity on the puts side; this could be either due to an expectation of a correction or due to hedging against long positions (in cash or futures market).

Backwardation: The basis of Nifty futures also witnessed a volatile pattern by moving up and down vis-à-vis Nifty. However, the Nifty July futures is on a par with the spot at 2265.75 against the Nifty spot close of 2265.60. The Nifty August futures, however, trails the Nifty by about 10 points.

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

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