The sentiment remained clouded last week, driven by the trend in the global markets, which were subdued in the earlier part of the week and became panicky towards the close.
The sentiment remained clouded last week, driven by the trend in the global markets, which were subdued in the earlier part of the week and became panicky towards the close.
Fears of large financial meltdown across troubled financial companies, mainly Lehman Brothers, and concerns on others like AIG, Washington Mutual weighed on traders’ minds. The Nifty’s decline was accelerated as we approached the last trading day on Friday.
The pessimism can be explained if one looks at the chart of open interest of Nifty futures and the cost of carry for the whole week. The intersection happened on Wednesday, where the fear grip increased as the cost of carry tumbled with the rise in open interest, indicating increasing short pressure.
On Friday, in spite of the market tanking further, the cost of carry increased as did the open interest. On Friday, both bears and bulls increased their bets.
The criticality of the 4200 level for both bulls and bears has led to rising bets. The last expiry closing was around 4200. The significant put writing in 4300 and 4200 September series for average premium of 100-150 also indicates that 4100-4200 is a good support. The implied volatility of puts has moved to almost 40, which indicates heightened activity and an likely sharp move.
The last two times the markets bottomed out, in March as well as June, put volatilities were around 40-42%. Based on this, as well as the fact that panic this time has not become broad-based except for the pivotals, markets may not tumble significantly due to its own weight like in the June expiry.
The short pressure indicated by rising open interest, falling cost of carry and declining prices was evident in banking, metals and telecom. I believe banks have bottomed out as these stocks have outperformed in spite of increasing short positions as well as global bearishness for the sector. SBI, ICICI Bank and Reliance Capital can be traded with long bias if prices fall further by 5% or the cost of carry turns negative.
Among metals counters, SAIL seems to be holding better and is worth looking at. Its cost of carry is sharply negative and has been negative for the last three expiries.
Slow and steady build-up has been observed in FMCG and capital goods sectors. I would consider Hindustan Unilever and Colgate good accumulation counters with a two- to three-month perspective.
Reliance Industries is somewhat subdued, where the last two weeks short position seems to be getting converted into delivery. If further short pressure is not seen in open interest in the coming week, by the September expiry, the scrip will most probably bottom out.
Overall, 4200 is a key level to watch for both bulls and bears. I believe unless strong negative news flow dominates next week, the Nifty may bottom out and move up from 4150-4200 levels and touch 4350-4400 levels.
The author is head, derivatives and strategy, PINC Research
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}