Nifty in consolidation mode; 5150 key support: ICICI Direct

In his opinion, "Oversold stocks may keep on performing and the likes of ADAG stocks or the subdued PSU banks or possibly the metal stocks where there are heavy shorts, may keep on moving on the back of short covering."

Below is the edited transcript of Gupta's interview with CNBC-TV18. Also watch the accompanying video.

Q: What are you recommending to the Nifty traders to do in terms of upside potential for the market now?

A: FII inflows have been quite positive in our index futures in the last two weeks. Around 3,000 crore of index futures buying is done by the FIIs, in cash also they have remained net buyers only but not to the large extent. If you look at S&P, 1,360 was a very critical level in the last two months also we saw that it came down from that level, which is a 100 day moving average. There were mixed data inflows there.

Despite this, it was absorbing the negative data and finally moving up. In the last two sessions, we saw it finally closing above 1,360. My sense is till it remains above 1,360, the emerging markets will also remain positive and S&P eventually may move towards 1,395.

Now in Nifty, if you look at the options traders bias, we had seen that 5,000 put base was the highest since the starting of the series but yet 5,100 put and 5,200 put are not picking up in terms of open interest. I feel that these two strikes will start picking up the open interest. There may be some consolidation in the market and till that time, 5,150 will remain the major support for the market on declines. So the bias remains positive above 5,150.

On the higher side we are still looking at 5,350 as the first target and once that is taken out then 5,450 also maybe tested.

The option premium has been declining continuously. They had suggested that it may not be the one way ride, it maybe some sort of consolidation but the put premiums have declined very fast than the call premium. So I think the downside seems to be limited at the current juncture and 5,150 should be held even on declines.

If you look at the breakout before what happened in the put options, the underlying was not moving, the Nifty was not moving before the breakout and premiums were declining like anything, 4,900 put and 5,000 put, we saw 10% of decline in the premiums and the market was just trading around 5,150. That suggests that the strong hands entered into the market before the breakout and still we haven’t seen the profit booking in the short put positions. So I believe the bias could be there in the positives, oversold stocks may keep on performing and the likes of ADAG stocks that we are seeing or the subdued PSU banks or possibly the metal stocks where heavy shorts are there, they may keep on moving on the back of short covering.

Q: How would you approach two of these stocks now; DLF had a big move yesterday and Bharti saw some fresh long positions getting added?

A: If you look at the highest call based in DLF and Bharti, in DLF it was Rs 200, now these positions have been rolled into Rs 210 and Rs 220 strikes but that is not a strong bias of the open interest. That is more the stuck up positions which keeps on rolling as the underlying moves up. So I believe the initial base of Rs 200 that will remain a strong support for DLF in the near-term even on the declines you can use it to go long. The bull call spreads at Rs 220 on declines in DLF can also be used.

Bharti I think Rs 320 call option was the highest call base. It has breached that level and due to which we are seeing that some short covering is coming up. But I like Idea also in this particular pack of telecom and Idea one can remain short in the Rs 80 put option because it has breached Rs 80 after a period of one month or so and previously also in the month of December 2011, we saw the bounce back came from Rs 80 levels to about Rs 100. So I think it is possible that it is going to expire or remain atleast couple of weeks above Rs 80 levels.

Q: How would you approach some of these metal names where there was short covering seen yesterday i.e. Hindalco, Sesa Goa?

A: I think if you look at the metal pack, it has a lot of shorts left and we haven’t seen yet any kind of major short covering coming into these stocks. So now what may happen if the market remains in this range of 5,200 to 5,350, it is very much possible that the metal stocks may start seeing short covering.

Sesa Goa is one pick along with Hindalco because Sesa Goa particularly, once this merger news came in Sterlite, we saw that the stock was not moving at all but slowly it is moving in a channel and if you look at the short build up, it has been huge. I understand that there are some arbitrage players who entered in the short positions but besides that also there are a lot of speculative short positions in the stock.

Around Rs 175-180, I saw that the lower end of the channel has been falling since the last one year. It tested that and finally the delivery base buying also to certain extent was seen around those levels and from there it has moved towards Rs 195. I think we can buy the stock between Rs 192-193, look for a target of Rs 205. If it comes below Rs 187, that should be the stop loss.