Technical outlook for Nifty in short term: Nirmal Bang

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Technical outlook for Nifty in short term: Nirmal Bang

The Nifty continues its upward journey in the February expiry, led by sectors such as banking, oil & gas and metals. With good FII inflows, better-than-expected earnings results of certain heavy weight companies and appreciation of the Indian rupee, the Nifty has gained over 3% since the start of the February expiry.

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The Nifty continues its upward journey in the February expiry, led by sectors such as banking, oil & gas and metals. With good FII inflows, better-than-expected earnings results of certain heavy weight companies and appreciation of the Indian rupee, the Nifty has gained over 3% since the start of the February expiry. (CMP: 5,345 as on 2nd Feb). Year-to-date (that is since January) it is already up 14%.

The Bank Nifty, which witnessed significant long positions, has nearly added 19.2% OI in the February series and is already up 3.3%.

On the PCR OI front for the Nifty, the continuous increase in its value from 1.28 to the current level of 1.4 (as on 2nd February), suggests an increase in the Put activity, which is expected to be dominated by sellers. This clearly indicates that the market is likely to remain bullish.

On the Options side, aggressive Put writing has been seen at strikes 4,900, 5,000 and 5,100, and now even at 5,200 since the start of the February expiry. On the other hand, a forward shift in the 5,200 Call to 5,400 Call has been observed. The 5,400 call has witnessed a significant addition in OI and, hence, it is likely to provide a strong resistance to the market.

Also, Volatility Index (VIX) on the Options front has been increasing despite the up-move in the market. With healthy rollovers in the February series and increasing volatility, oscillating movements are likely to continue in the market.

FIIs have recently pumped in a fair amount of liquidity into the Indian markets, taking the Nifty closer to its 6-month high of 5,434 (4th Aug'11) after touching a 52-week low of 4,531 (20th Dec'11). In 2012, FIIs have bought over `13,000 crores (2nd Feb) in the equity cash market and MTD over `4,000 crores (2nd Feb).

On the other hand, domestic institutions who had bought over `27,000 crores in 2011 remained net sellers in the current market rally. In 2012, they sold over `6,600 crores and `1,500 crores on month-to-date in the cash segment.

Technically, the Index recently formed a series of higher tops and bottoms since the lows of December'11, which is a bullish Dow signal. There is an immediate resistance at the 5,410 level on the upside and support lies at the 5,280 and 5,210 levels. The oscillator situation suggests the presence of a negative divergence pattern. But there is no sufficient evidence for any top and, therefore, we conclude that the advance is not done yet.

The Index has also managed to close above the falling channel pattern from the highs of November'10, which is a bullish sign. Currently, the index is trading above its 100- and 200- simple moving averages. And if it sustains above the 5,250 level, the rising window pattern formed in the recent trading session would mean the short-term uptrend will continue.

We maintain a medium-term target of 5,410 and 5,460 levels on the upside and recommend some profit-booking near this zone. The recent rise in the index from the lows of Decmeber'11 coupled with a sharp rise in volumes and breadth, is again a bullish signal. Of course, we do need to look at price action if the rise continues further.

The short-term uptrend will remain intact till the support level is not breached. The weekly charts have formed a bullish pattern. This is a positive and, hence, we should look for more gains ahead in this month.

The cement sector has outperformed the broader index and we are positive on ACC , Ambuja Cements and Ultratech Cement for an upside of 10% to 15% from current levels.

Most Nifty stocks are reflecting a positive divergence pattern, suggesting a medium-term bottom is in place. Many stocks are exhibiting a long-range bar for the month, which is a strong bullish signal.

The Bank Nifty faced crucial hurdles near the 200-DMA and has confirmed the uptrend by closing above its recent high of the 9,980 level. The index has managed to breach the crucial hurdle of 10,100 and if it sustains above this level, we can expect it to rise to the 10,220, 10,350 and 10,460 levels. It has support at the 9,940 level on the downside.

Strategy

With a view of a range-bound market, traders can initiate a short Strangle on the Nifty at strikes 5,000 and 5,400. They can sell 5,000 Put and 5,500 Call, fetching a combined premium inflow of over 65 points. The break-even for the strategy will be 4,935 on the downside and 5,565 on the upside. The initiator can earn a maximum of `3,250 (65*50) if the Nifty February series expires between 5,500-5,000 levels. However, the loss remains unlimited beyond the break-even range.

Source: Nirmal Bang's Beyond Market

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