Except for the week gone by, it is difficult to recall any other instance in the history of India’s stock trading when the Nifty had a negative close on every day of the entire week.
Unless Nifty closes below 5500 decisively, avoid short positions
Except for the week gone by, it is difficult to recall any other instance in the history of India’s stock trading when the Nifty had a negative close on every day of the entire week.
Market closed at 5663.25 against 5932.40 last week, a fall of 4.54% week-over-week.
This is very much in line with global peers. Fall in global markets, especially in the West, was triggered by write-offs by financial majors such as Citibank, Morgan Stanley and Merrill Lynch owing to subprime woes.
Disappointment is not just restricted to financial majors. Of late, fall was triggered by IT major such as Cisco Systems Inc and mobile phone chip maker Qualcomm Inc.
Apart from corporate results, global economy is also feeling the pressure of rising crude oil price, which is kissing the $100 per bbl mark. We have been simply reacting to global market jitters, though the degree is much lesser even if the direction is the same.
Our markets are also under liquidity pressures arising out of the P-note issue. Nifty is facing a continuous selling pressure at higher levels.
This is being witnessed in the cash segment as well as futures and options segment. In FNO, beginning of the previous week saw some long unwinding taking place. Rest of the week saw formation of shorts.
Nifty futures open interest surged to 6,48,245 contracts from 6,21,086 contracts week over week and a larger portion of these positions were on shorts.
Participants are not confident of the market and are forming short positions. Even on the auspicious Diwali Muhurat trading session on Friday, they left no opportunity to take shorts and the market closed in the red, which is indeed a rare phenomenon.
Before market corrected from the sub-6000 levels, we saw good call writing taking place in 6000 and 6100 levels and at the same time put writing in 5800 and 5900 strike prices.
After the fall, call writing has been more active in 5700 and 5900 strike prices, indicating immediate resistance levels for the market.
However, put writing has gone on the back seat and is visible slightly in 5500 put, indicating support for the market. Due to more call writing and less action in put, PCR-OI has tumbled to 1.11 levels.
Such low levels of put-call ratio were seen before and after February 2007 correction. IVs, though at higher levels of 36.25, have surprisingly not increased with the fall in markets, again sending a wind of caution.
RPL and RNRL, who were wealth creators for participants, turned out to be wealth destroyers for retail investors who got stuck in them at higher levels.
Both stocks have huge outstanding position and negative undertone in market is not going to help long holders.
We suggest not doing any averaging in these two counters. Participants who are stuck in these, should sell out of money call options near to their buying prices to reduce their cost and at the time of unwinding, should unwind both trades at the same time.
Taking into consideration the global and local market scenario, we suggest investors book profits in long positions at every rise in the market.
Since we have already corrected almost 400 points in nifty from top, it is advisable to not to go short unless Nifty closes below 5500 decisively. Existing shorts should be covered in the range of 5550-5600.
siddarthbhamre@yahoo.co.in
The author is fund manager, derivatives, Angel Broking
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