The Hindu Business Line : Undertone in Nifty turns positive

THE Nifty was able to regain strength last week, where the full-session trading took place only for two days apart from auspicious Moorat trading on Diwali day.

Last week, we had anticipated a negative sentiment for the Nifty and had advised the investors to go short on Nifty. But contrary to our expectation, the Nifty recovered strongly, though trading volumes remained lower.

We had indicated that the Nifty could dip to 2185-75 levels. Also, we had said if the Nifty could breach 2355-60 level, it can reach 2420-25 levels.

Those who had gone short on Nifty would have booked losses.

For the ensuing week, we expect a mixed trend for the Nifty even as there was no significant change in sentiment indicators such as put/call ratio and implied volatility.

If the Nifty begins on a positive note and holds on to current levels, it may go up to 2465-75 levels.

On the other hand, if it fails to sustain current levels, it may dip to 2375-2365 levelsand may even dip to 2300.

However, we expect the Nifty to begin on an optimistic note, as the undertone appears to have turned positive.

Strategy: Investors may consider call backspread strategy by selling one Nifty 2400 call @ Rs 53.10 and buying two Nifty 2450 calls @ of Rs 62 (Rs 31 each).

While the risk is limited in the strategy, the return could be unlimited.

Here, this strategy provides limited loss on the downside of only Rs 9 a contract (Rs 62-53) while margin could be on the higher side. Volatility increases would help the position.

Volatility view: The implied volatility levels remained at around the previous week's range.

The puts implied volatility was firm at 26 per cent against the previous week's levels of 26 per cent and the calls IV at 29 per cent (29 per cent).

The firmness in volatility above 25 per cent indicates uncertainty in the market. Moreover, the annualised volatility remains firm over 30-per cent mark at 30.87 per cent (30.13 per cent).

This also indicates the higher chance of the Nifty being in highly volatile territory.

Put/call ratio: Open interest put/call ratio declined to 1.48 as against the previous week's level of 1.7 and volume-wise put/call ratio to 0.81 (0.95).

The OI put/call ratio, which saw a decline from well over two-point mark a few weeks ago, is ruling firm at about the 1.5-mark.

The decline in open interest PCR on week-on-week basis indicates the possibility of an uptrend.

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

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