If the Nifty closes above 4,750, the projected target would be between 4,850-4,900.
Volumes rose during a volatile week where the market eventually closed with small net losses. At the weekend, most signals appeared to indicate bullish sentiment.
Index strategies
Week on week, open interest (OI) increased in index instruments as well as stock futures. Some Nifty calls were cashed and the put-call ratio was healthy. The futures OI is concentrated in September with around 97 per cent of Nifty futures OI in the near-month. Around 40 per cent of Nifty option OI is in October or beyond.
FIIs turned heavy sellers again after short covering during settlement. They also reduced derivatives exposures. The rupee was slightly weaker. This may have contributed to the CNXIT's mild outperformance of the Nifty. All traded index futures settled at noticeable premium to the respective underlyings. This would seem a mildly bullish signal.
If we assume the FIIs will remain bearish, and the rupee weak, going long on the CNXIT is reasonable. The Bank Nifty has been under pressure in the wake of rising consumer inflation since the market is discounting either stable or rising interest rates. However, the Bank Nifty may be due for a bounce as well since it has underperformed for several weeks.
The pattern of upwards breakout followed by consolidation in the past 10 sessions has helped establish clear support and resistance levels and also projected targets. This is helpful to traders.
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The breakout occurred with a close above 4,600, on high volumes and this was confirmed by a new 52-week high. In terms of support, the Nifty should stay above 4,550-4,600, where the downtrend last found support. If that support level is broken and Nifty closes at 4,500, the breakout would be annulled. In that case, the market would revert to a range-trading pattern with chances of sliding till around 4,350.
Assuming the support holds, there's a band of stiff resistance between 4,725-4,750. The Nifty has tested that resistance several times but been unable to close above 4,750. If it closes above 4,750, the projected target would be between 4,850-4,900. That 4,850-4,900 target is where we'd expect the market to reach on the breakout above 4,600. Among supporting evidence for a continuation of bullishness, the Nifty put-call ratio looks good. The September PCR in terms of OI is at 1.4 while the overall PCR is at 1.2.
If we examine the options chains, the highest put OI is associated with the September 4,400p (premium 39) and 4,500p (60). Similarly, the highest call OI is associated with calls between 4,700c (131) and the 5,000c (33) range. Adjusting for premiums, the consensus expectations seem to be between 4,350 and 5,050 for traders in the September settlement. Technical analysis suggests that the upside is a stretch, but the downside could be hit.
A trader can clear rules and stop losses by staying focussed on these support-resistance levels. Given that it's early in the settlement, it is possible to seek option spreads that are slightly far from the money in the hope of finding better risk-reward ratios. The Nifty future was settled at 4,695 with the underlying closing at 4,680. A close to money bullspread of long 4,700c (131) and short 4,800c (86) costs 45 and pays a maximum of 55. This is practically on the money so the almost balanced risk-reward is understandable.
A further from money bullspread of long 4,800c and short 4,900c (54) costs 32 and pays a maximum of 68. A close- to-money bearspread of long 4,600p (92)) and short 4500p (60) costs 32 and pays a maximum of 68. These two spreads are almost equidistant from money and the risk-reward ratios are quite attractive. Directional traders would probably prefer the bullspread due to the bullish signals mentioned above.
Taking two way positions involving a long-short strangle combination such as a long 4,800c (86) and long 4,600p (92) versus a short 5,000c (33) and short 4,400p (39) costs a net 106 and pays a maximum of 94. The breakevens are at 4,494 and 4,906. This is not too attractive because it has an adverse risk-reward ratio. Strangle combinations with better risk-reward ratios will tend to have breakevens further from the money.
A long future with stop loss at 4,650 (maximum loss 45) can be coupled to a bear spread of long 4,600p and short 4,500p (max loss 32). The maximum loss between 4,600-4,650 is 77, upside gain is unlimited and the maximum downside return is a gain of 23 at 4,500. A short future with a stop loss at 4,750 (max loss 55) can be coupled to a bullspread of long 4,800c and short 4,900c (max loss 32). The downside gain is unlimited and the maximum loss is 87 between 4,750-4,800. On the upside, the maximum gain is 13 at 4,900.
Although the returns in such positions are skewed in the direction of the future, these look reasonable. It's early in the settlement, which means that a fair amount of movement can be expected in either direction. Hence, there ought to be a positive return.
| STOCK FUTURES/ OPTIONS In the stock market, most of the high volume is being generated by the usual suspects which are mainly in real estate and in the financial sector. There is a certain amount of speculative interest in Renuka Sugar on the back of sugar shortage and auto stocks like Tata Motors and Maruti. Infosys is also picking up OI. |
Most of these look likely to move in tandem with the overall market. One potential long position is Praj Industries which has just made an upside breakout and appears to have an independent bullish trend.