The Hindu Business Line : Nifty may head south — Indicators suggest negative bias

We expect the Nifty to exhibit weakness for the coming week, as indicators such as put/call ratio, implied volatility and cost of carry point towards such a trend.

If the Nifty is able to sustain the current level and sweep past 3075-80, then the trend could turn positive and it may surge to new highs.

On the other hand, if it fails to sustain at current levels, a dip below 3040 could take the Nifty to 3000-3005 levels.

On balance, the chance of the Nifty dipping appears to be bright.

Strategy

Go short on Nifty futures if the Nifty spot dips below 3040 levels with a stop-loss at current levels (3050); it can be adjusted further down progressively should the Nifty fall further to maximise profits.

Investors may also consider buying the Nifty 2950 puts at Rs 49.70.

Factors to watch

Budget expectation vs actual proposals; crude price, following reports of an explosion at a Saudi Arabian oil refinery due to terrorist action.

In the wake of these two crucial factors, we advice investors to adopt a cautious trading strategy and follow a strict stop-loss mechanism.

Volatility view

The implied volatility for puts rose to 23 per cent against last week's level of 17 per cent; on the other hand, calls IV declined a tad to 17 per cent (18 per cent). The sharp gain in puts IV indicates that a lot of activity is happening on the put side, painting a negative picture.

The drop in calls IV also suggests limited upside.

With the annualised volatility on the Nifty also declining to 18.09 per cent, (below the implied volatility levels of puts), we can expect a downtrend for Nifty.

Open interest put/call ratio decreased to 1.53 (1.66) while volume-wise PCR increased to 1.29 (1.1).

The increase in volume PCR indicates significant squaring up of positions on the calls side when the market surged last week.

Though the OI put/call ratio decreased marginally, it still rules above the crucial 1.5-mark indicating a bearish undercurrent.

Backwardation

While the Nifty futures closed the week at 3050.05, the Nifty spot ended at 3044.10, i.e. a discount of about 4.40 points. This also indicates a negative sentiment.

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

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