Nifty may rebound partially

The Nifty swung wildly before ending the week at 4333.35 against previous week's 4401.45, a drop 1.5 per cent. The Nifty future closed at 4299.20 (4360.35)

Due to heightened volatility, open interest positions saw some decline. Open interest, which had hit an all-time high of Rs 1,02,077 crore on July 28, increased to Rs 84,433 crore against last week's position of Rs 80,375 crore.

But intra-day open positions surged to Rs 85,275 crore. Currently, the overall open positions stand at 32.35 lakh contracts against last week's 31.17 lakh. Intra-day open positions surged to 33.01 lakh contracts.

However, the turnover was impressive on the back of heavy selling, particularly on Thursday and Friday.

Follow-up: Last week, we had presented two strategies: (a) to consider shorting Nifty futures with a stop-loss at 4440; and (b) to buy Nifty 4400 put at Rs 135. Both these strategies could have yielded handsome profits to investors.

Outlook

The Nifty future is at a critical stage. After dropping sharply, it made a smart turnaround during the later part Friday. Nifty could recover further ground, but the bullish undercurrent has also disappeared. As long as Nifty future rules below 4520-25, bearish undertones may prevail.

To provide confirmation of bearish trends, the Nifty future has to dip below 4290 level. In that event, it may go to a low of 4135. To regain bull momentum, the Nifty future has to cross the initial resistance level of 4420-mark.

Recommendation

We expect the volatile trading to continue this week as well. We advise investors to consider going long on the Nifty future if it crosses 4335 levels, keeping the stop loss at that level. Adjust the stop-loss to trail index movements, so as to minimise loss. This recommendation is valid only for two days.

Implied volatility

Implied volatility increased further, indicating another bout of uncertainty. While the puts IV jumped to 26 per cent against last week's 24 per cent, calls IV increased to 33 per cent (30 per cent). The increase in calls IV is mainly due to the investors' willingness to write call options, indicating a negative sentiment towards market.

Put/call ratio

Both volume and open interest put call ratios declined; while volume PCR dipped to 0.87 (1.36) and open interest PCR decreased to 1.31 (1.40). The drop in open interest positions is mainly due to lack of interest in market and also on squaring off puts positions when the market slumped quite sharply.

Backwardation

The Nifty futures discount narrowed down a bit. The discount, which was around 40 points previous week, narrowed down to 35 points. This indicates that short positions were squared off during the day itself and the chance of further short-covering appears minimal.

Stock futures

SBI (Rs 1,635): We advised investors to go short on SBI Futures. Though the strategy is in positive zone currently, it did not touch our expected level of Rs 1,540. Currently, SBI is ruling around Rs 1,607 after dipping to a low of Rs 1,585.

FIIs trend

The cumulative FII positions as percentage of total gross market positions on the derivative segment as on August 9 remained firm around 35 per cent (36.51 per cent on July 26). FIIs were broadly net buyers during last week. However, they reduced their open positions to Rs 18,943 crore against last week's Rs 19,213.77 crore in index futures and increased to Rs 28,981.33 crore (Rs 26,698.36 crore) on stock futures. On position wise, they currently hold 8,51,918 contracts (8,88,674 contracts) of index futures and 9,62,695 contracts of stock futures.