Given that it has been a one-way upmove, there is a good chance of profit-taking in the last five sessions of April.
Derivative volumes have doubled and the carryover trend is healthy. Volatility in a rising market is being reflected by rising premiums. Traders should be braced for a sell-off at settlement.
Index strategies
Daily derivative volumes are now comfortably above Rs 70,000 crore and much of the volume is obviously being contributed by Indian traders. The FII outstandings amount to around 35 per cent of all open interest (OI).
With two weeks to go till settlement, volume trends will stay high. Given that it has been one-way traffic North, there is a good chance of massive profit-taking in the last five sessions of April. That may trigger a short-term downtrend.
Daily volatility has risen along with rising volumes and that historic volatility is being reflected in higher option premiums. The carryover trend is healthy. About 39 per cent of Nifty option volume has switched into May and beyond. About 10 per cent of Nifty futures volume has moved into the May-June series, while a lot of April Nifty futures OI has been extinguished. The Nifty options market has healthy signals as well. The put-call ratio is at 1.6 overall (in terms of OI) and it is at around 1.9 in April, which is higher than comfort levels though theoretically bullish.
Another sign of an optimistic market is heightened interest in subsidiary indices. The CNXIT and especially the Bank Nifty have generated lots of OI. The CNXIT looks bearish. Infy came up with weak guidance. Also, the rupee has gained through the last 10 sessions due in part to FII buying.
The Bank Nifty has been a big driver of the market with a very high-beta relationship to the Nifty. It delivered double-digit gains last week as inflation fell and banks responded with rate cuts. Further cuts are expected. The Bank Nifty has massive OI of over 11 lakhs.
There was some profit-booking late last week but banking could continue to generate gains for another 3-4 sessions. Arbitrageurs should watch the April-May differential as carryover trends may create opportunities for calendar spreads.
The Nifty is challenging key resistances clustered around the 200 Day Moving Average, which is one indicator tracked by every technical trader. If the market can cross the 200 DMA and stay above it for any sustained length of time, there would be hope the bear market that started in January 2008 is coming to an end.
In the narrow context of the April settlement, the Nifty is likely to see a lot of 100-150 point sessions. It could swing up till the 3,650 mark if the 200 DMA cross-over occurs. If the cross-over does not happen, the index could swing down until 3,250. If a big sell-off occurs, there is a fair amount of support at 3,000-3,050.
The trader with a 10-session outlook should focus on the 3,000-3,700 zone. If the market does drop below 3,000, and that cannot be entirely ruled out, it would see another support at 2,800-2,900. Below that, a drop till 2,500 is likely. At the moment, it seems ludicrous, but it is possible and even statistically likely that 2,800 at least, will be tested in the May settlement.
Elections are one major factor which could lead to bearishness. Until the next government is installed and looks somewhat stable, sudden panic attacks are likely. There are still chances of a massive bull trap that works across a three month timeframe (starting early March 2009).
The other factor to be borne in mind is historical retracement patterns. If this is a major intermediate rally inside a bear market, a 900-1,000 point rise (from 2,539) is likely to be followed by a 400-500 point sell off in the immediate reaction.
Option traders who are long could reap the benefits of a derivatives market where implied volatility is still lagging historical volatility. The risk-reward ratios for conventional bullspreads and bearspreads close to money is pretty good. So are the possibilities for setting up long strangle and short strangle combinations.
A long 3,400c (Rs 91) and short 3,500c (Rs 52) costs a maximum of Rs 39 and pays a maximum of Rs 61. A long 3,300p (Rs 70) and a short 3,200p (Rs 400) costs a maximum of Rs 30 and pays a maximum of Rs 70. Both these positions are likely to be struck before settlement. It only requires a swing between 3,200 and 3,500.
A long strangle of say long 3,500c (Rs 52) and long 3,100p (Rs 21) is more dangerous due to expiry risk. It can be offset with a short 2,900p (Rs 8) and a short 3,700c (Rs 15). The resulting position costs Rs 50 and breaks even at Rs 3050, 3550 with a potential (one-way) maximum return of Rs 150.
| STOCK FUTURES/ OPTIONS Apart from banks themselves, bullishness in the banking sector could have a knock-on effect for rate-sensitive and capital intensive industries. This is most evident in real estate, which has seen a huge rally from historic lows. Engineering and infrastructure scrips have also been beneficiaries. |
The problem is, the movements do not indicate a clear direction in most cases and there is a real chance of being caught in a reaction. If the market continues to move up, a long position in Axis Bank would be an outperformer. The other possibility is to short metal stocks – SAIL could drop, for instance.
