The Hindu Business Line : Momentum set in Nifty futures

Critical factors
Nifty futures still rules in considerable discount to Nifty
Implied volatility remains firm for both calls, puts above 30 pc
Trading volumes remain modest on account of uncertainty

As predicted in this column last week, Nifty moved up sharply; it closed the week at 3917.35 against the previous week's 3752.

There was smooth accumulation of open interest positions representing positive sentiment; overall open interest positions moved up to Rs 51,879 crore from last week Rs 44,454 crore.

We had presented a strategy that was valid only for first two days of last week i.e. buying the 3900 Nifty call. The strategy provided decent profits.

Outlook

The chance of Nifty futures piercing the resistance levels appears bright; it faces resistance at 3940-3950-level. Once it is breached, it has the potential to touch a high of 4140 though it faces minor resistance at 4000 in between. The bearish undertone, which was hurting the index for quite sometime, has negated due to the strong show last week.

The possibility of Nifty futures testing resistance levels appears high this week particularly during the initial sessions. Firm trends in implied volatilities (for both calls and puts) confirm likely volatility in the market.

Expecting a bullish trading pattern to continue, we advise investors to consider going long on Nifty futures keeping a stop loss at the day's low level. Adjust the stop loss suitably to trailing Nifty futures so as to maximise profits.

Alternatively, investors may also consider buying Nifty 4000-call @ Rs 29.35, as Nifty may remain positive in the first couple of days.

Put/call ratio

Open interest put/call ratio increased to 1.05 against the previous week's 0.86 while volume wise increased to 1.24 (0.96). This indicates that a few calls positions were squared off when Nifty edged up sharply.

Implied volatility

IV displayed a divergent trend for calls and puts. While puts IV decreased to 32 per cent from last week's position of 34 per cent, calls IV increased to 33 per cent (32 per cent). The relative firmness in calls implied volatility suggest that calls positions were added in anticipation of further rally in Nifty.

Backwardation

Nifty futures swung wildly around Nifty. However, the discount remained firm though it narrowed a bit; Nifty futures now trails Nifty spot by about 21 points as against last week's discount of 30 points. This suggests that short positions were squared off when Nifty futures recovered sharply.

Tata Steel (Rs 489): We had presented a positive outlook on the stock and had said that it faces resistance and support at Rs 512/Rs 430, respectively. Those who had followed our advise would have earned decent benefits as the stock touched our expected resistance level.

Satyam Computer (Rs 481): The stock has just managed to stay above its key resistance level of Rs 480. If it opens on strong note, it has the potential to go up to a level of Rs 550 and might even touch Rs 600. A drop below Rs 455 could weaken to a low of Rs 425 and might even dip below Rs 400. We feel the stock is in overbought position and the chance of trend reversal appears high. Consider shorting Satyam Computer futures keeping the stop loss at day's high level. This strategy is only for those who are willing to take risk, as the stock could move up quite sharply at a fast pace. Market lot is 600 contracts per unit.

FIIs trend

The cumulative FII positions as percentage of total gross market position on the derivative segment as on April 4 slipped quite sharply to 35.95 per cent against the last week Thursday's position of 37.97 per cent. After indulging in moderate buying in the first four days, they resorted to aggressive selling on Friday with higher participation. (The opinions expressed in this column are based on technical analysis. There is risk of loss in trading.)

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