Traders covering short positions

The bull run in equity markets continued last week without any loss of traction. The Nifty closed at 6018.3, near its highs, in spite of selling by domestic institutional investors.

The index continues to be volatile with an upward bias.

The premium of Nifty futures to spot has decreased from 29 points at the beginning of the week to 12 points on Friday, indicating that traders have started covering their short positions. The implied volatility has fallen from 22% to 19% for at-the-money (6000 strike) October.

As we go into the expiry week, one of the main events that could determine the direction of the markets is the court verdict on the sensitive Ayodhya issue on September 28. The Nifty could face resistance at 6063 and has a very strong support of 5945.

Stocks in the US markets rallied last week to their highest levels since May.

The US dollar also slid to a 8-month low. Orders for US capital equipment rose for the month of August, showing that business investment was holding up.

In Europe, German business confidence rose to its highest in 3 years. On the flip side, the cost to protect bonds of some European nations reached record highs.

The VIX index (fear index) closed 2% lower at 21.17%, indicating that the traders confidence in the markets is very high.

Foreign institutional investors (FIIs) are aggressively buying lower side puts in the October and December series, which means volatility will remain high in the coming weeks.

The open interest in the September series has shifted form 5700 calls to 6100 calls. On the put, it has shifted from 5900 puts to 5400 puts, indicating that markets may not go below 5900 in September. The put call ratio has gone up from 1.76 to 1.86 last week, showing that traders are securing their downside.

Last week the Midcap index was up 1%. The big index gainers were Hindustan Unilever (3.84%), IDFC (5.15%) and Hero Honda (3.06%).

Stock ideas
Adani Enterprise: Buy with a target of `710 and a stop loss at `650
Bharat Forge: Buy with a target of `370 and a stop loss at `351
Oriental Bank of Commerce: Buy with a target of `460 and stop loss at `432

Aban Offshore: Buy with a target of `920 with a stop loss at `830
Tata Chemicals: Buy with a target of `440 and a stop loss at `395.
Disclosure: We hold positions on behalf of our clients on
the Nifty.

Divya Khanna is AVP-structured products at Mangal Keshav