Sailav Kaji

The markets finally succumbed to profit-taking after having seen a strong upmove for three weeks. Short build-ups were seen in Nifty futures around 5,250-5,300 levels as the index tried to breach that level thrice without success.

The cost of carry for the Nifty May futures also slid 25-30 bps during the week.

Many stocks that had given phenomenal returns in the last 20 trading sessions witnessed profit booking. Among these, the worst hit were refinery, banking and real estate stocks.

Globally, things were slowly turning hawkish as crude oil prices reached new highs of $126 a barrel. This increased inflationary concerns, both globally and in the domestic markets.

On Thursday, the Securities Exchange Commission’s statement that investment banks have to provide disclosures about their capital resulted in the sentiment amongst financial stocks getting hit. On Friday AIG reported its losses for the quarter which triggered further sell off. The Dow Jones index closed at a crucial level of 12,750 on Friday.

In India, the up-move over the last few weeks had resulted in a positive sentiment amongst market players.

This could be seen from the Call implied volatilities, which had risen above that for Puts. This, along with the positive cost of carry, indicated that the market is touching overbought scenario.

The average implied volatility for the Calls and Puts were around 26%, well below the average 35% seen in the last few months. The newly launched VIX index by the National Stock Exchange was also at its lows at around 24%. Such a low implied volatility suggested rangebound movement for the Nifty for the next 15 trading sessions.

The range expected was 5,100 to 5,300. But as Nifty fell below 5,100, fresh shorts got built as the Put writers sold Nifty to hedge their deltas.

Nifty currently stands at a crucial level. It might witness support emerging around 4,900 levels because of strong Put writing at those levels. This could also be because the long buildups started from those levels before the upmove. If it falls below that level, the Nifty could touch the 4,650 levels. The dependency on the global markets will continue to exist.

The better part is that, the short buildup in Nifty is not that significant.

On the stocks front, we continue to be bullish on Idea Cellular. The rise in open interest is quiet significant and it is supported by the bulk deals happening in the market. Private Sector Banks like ICICI, Axis and Kotak Bank might witness some short covering as they have fallen around 15% from their highs.

Index major ONGC, which has witnessed significant rise in open interest post April expiry is yet to give an upmove.Weakness might be seen in IT majors like TCS and Infosys. The author is head, derivatives and strategy, PINC Research

Source : DNA