F&O Outook: Weakness likely to continue

We had indicated weakness in the markets last week and a possible target of 4,600 for the Nifty. The markets on Monday tested the 4,800 levels and closed at 4,857.

Our expectations were based on downturn in technical pullback last Wednesday and consolidation of open interest in Put options at the strike prices of 4,700 and 4,800.

During the first four trading days of February month contracts, there was a built-up in open interest near Nifty 4,700 and 4,800 strikes. The OI in 4,700 Put increased by 32.6 per cent to 8.34 lakh shares, while the 4,800 Put witnessed 72.3 per cent increase to 4.46 lakh shares.

The moot question was why one should buy Puts at 4,700 and 4,800 levels by paying a 10-15 per cent downside premium when the Nifty was trading at 5,300-5,400 levels. We argued that the traders must be expecting markets to turn weak in the near future and go below 4,700.

According to Kamlesh Langote of vfmdirect.com, the 5,000 level may act as stiff resistance in the near future.

The Nifty 5,000, which was broken on Monday, had acted as weekly support in the last two weeks, as indicated by the build-up of 14.40 lakh shares of 5,000 Put options.

The markets are now heading to 4,600. The Nifty February futures contracts indicate further weakness, with the discount widening from 33 points to 47 points and short positions open interest increasing by 11.07 lakh shares.

The Nifty PCR fell further to 0.87 from 0.95, indicating the continuation of oversold positions. The market-wide advance decline ratio was 1:19 for NSE stocks.