Technical projections suggest a downside target of 2,300 on a breakout below the support at 2,550.
A very low volume and low volatility means that there’s a muted lead into the settlement. Carryover has been average but there was some indication of short covering on Friday.
Index strategies
The FIIs have been continuous sellers through the last week. This is no surprise since they have been selling more or less without a break since October. However, it has pushed the rupee down to new all-time lows. That in turn, has led to pressure on the Indian banking sector, which has been amongst the worst performers. The usual buffer in a scenario with a weak rupee is the IT sector but IT hasn’t come through yet though it has lost less ground than other sectors.
On Friday, domestic institutions, which had also been sellers, became buyers and that was enough to turn the trend around in a low-volume session. With settlement around the corner, it may be enough to trigger a phase of short covering from the FIIs. If that happens, the market could bounce quite a distance.
Either way, expect high volatility, which has become normal in the past few months and a volume expansion, which could lead to disproportionate price swings. The average session will have about 150-200 points differential between high and low.
The carryover pattern has not been particularly strong so far. About 17 per cent of Nifty futures open interest has moved into December and beyond. About 45 per cent of Nifty option OI has moved to December and beyond. The BankNifty has also seen a strong trading pattern and a fair amount of carryover into the December series.
As always, the FII attitude is the key to what is likely to happen next week. A lot of the sales this month have been versus delivery with the simple purpose of meeting redemptions. However, there should be enough short interest in the market to ensure at least one big up-session where resistance at 2,800-2,850 is tested.
The other signals are however bearish. The Nifty put-call ratio for November is extremely bearish – in terms of OI it is down to the 0.7 mark. The overall PCR is also bearish at about 0.9. This looks like a reliable signal and it means net losses.
On the downside, the Nifty has bounced several times from 2,550 and once, from 2,500 in the recent past. Those levels are liable to be tested again. The bulls and bears will have a key tussle in the range of 2,500-2,550 and if the 2,500 level breaks, there is really little support before the 2,250 mark. Technical projections would also suggest a downside target of 2,300 on a breakout below support at 2,550.
The Bank Nifty and the dollar currency future are likely to be lead indicators for both downside breakouts as well as short-covering. The rupee is already at a historic low and any short-covering by FIIs will lead to a snap-back. The BankNifty usually responds positively to a rupee bounce. In fact, the BankNifty did show signs of a possible turnaround on Friday. There is a clear divide in the industry – the PSU banks including the pivotal SBI look to be much stronger than most of the private banks.
Assuming short-covering does occur, a long BankNifty is likely to outperform the Nifty itself. If the rupee continues to swing down however, a long CNXIT is more likely to provide a good hedge. Positions in either of these indices should be strictly short-term, preferably not held overnight and also tightly stopped.
A Nifty option trader would have to assume that the market will traverse a minimum distance of 2,500-2,800 next week and be prepared for a downside till the 2250-2300 levels. There is no liquidity in the option chain below 2300 so that has to be the floor in practice for a trader.
A bullspread with long 2,800c (49.4) and short 2,900c (21.7) costs 29 and pays a maximum of 71. A bearspread with long 2,600p (52.15) and short 2,500p (32.15) costs 20 and pays a maximum of 80. The same bullspread of long 2,800c (167) and short 2,900c (125) in the December series costs 42 and the bearspread of long 2,600p (169) and short 2,500p (134) costs 35.
Any of these positions are liable to be hit next week although the bullspread won’t be fully realised. All of them have reasonable risk-reward ratios. Despite the expiry risk, November positions may make sense since they are cheaper and have better return-risk ratios. The bearspreads are more tempting.
Another way to try and generate some income is to sell away from money calls such a naked short Nov 2,900c and wait for it to expire. Strangle and straddle options are limited due to the lack of quotes in the option chain below 2,300.
If you hold both a long 2,600p-short 2,500p bearspread and a long 2,800c-short 2,900c bullspread, the net cost of the position would be 49 and the payoff on a breakout till either 2,500 or 2,900 would be 51. This is reasonable.
| STOCK FUTURES/OPTIONS Quite a few stocks look capable of moving into a rally if short covering starts. The metals sector could be a point for comebacks – Sail already seems to have made a bottom. Keep a stop at Rs 58 if you decide to go long in Sail. |
Another possibility is Cipla – keep a stop at Rs 175 if you go long. But the most attractive possibility appears to be ONGC, which seemed to have genuine strength in its recent rally. Keep a stop at Rs 670 and a target expectation of Rs 750.
