K.S. Badri Narayanan

Nifty outlook: Last week, we had indicated that Nifty was poised at a critical level and had we gad expected a major breakout if it breaches the 2110 level. Also, we had indicated that if it dips below 2065 levels, the Nifty could touch 2000-1990 levels. But the market was range-bound and did not test either of these levels. This week also, there was not a marked difference in the outlook for the Nifty though the sentiment turned a tad bearish as indicators such as cost-of-carry, implied volatility and put/call ratio present a negative picture. If the Nifty (spot) dips below the 2065 levels, it can go to the levels of 2000-1990 levels.

However, the chance of another week of lacklustre trading is not ruled out.

Strategy: Investors may consider shorting the Nifty if it (spot) dips below the 2065 level with protective stop placing at 2095-2100 levels.

If the market open down with sharp gaps on Monday, the protective stop-loss can be placed at the day's high levels.

Volatility view: The implied volatility of puts and calls witnessed a divergent trend. While the puts IV jumped sharply to 19 per cent from the previous week levels of 15 per cent, the calls IV inched down to 16 per cent (17 per cent).

Implied volatility is the perceived volatility in the index during the coming weeks; the firmness in puts IV indicates that traders are betting on the downside of the market. The weakness in calls IV also indicates that traders are not betting on an upward trend in the market.

The annualised volatility levels also weakened to 18.7 per cent (21.7 per cent) indicating the possibility of the lacklustre trading.

Put/call ratio: The volume-wise put/call ratio on Nifty declined sharply to 0.69 (0.94) and open interest-wise slipped to 1.21 (1.27).

The relative firmness in open interest of PCR paints a negative picture as traders have kept their long puts positions open in anticipating a decline in Nifty. The decline in volume-wise put/call ratio was due to the sluggish trading activity.

Backwardation: The discount of the Nifty futures remained around the previous week's level; the Nifty June futures now trails the spot by 19.05 points against the previous week difference of 18.40 points.

The firmness in backwardation in Nifty futures also indicates a negative bias for the Nifty.

Cost-of-carry: It also points to a negative outlook by remaining sharply negative.

(The opinion expressed in this column is based on technical analysis. There is risk of loss in trading.)

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