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Last Updated : Oct 15, 2015 06:11 PM IST | Source: CNBC-TV18

Market poised to break out; put on this trade: Analyst

The recent resistance witnessed by the market could be the result of profit taking from traders who expect some resistance at the 8,250-8,280 levels but the bias in the October series remains on the upside, says Vineet Bhatnagar, MD of PhillipCapital.


The recent resistance witnessed by the market could be the result of profit taking from traders who expect some resistance at the 8,250-8,280 levels but the bias in the October series remains on the upside, says Vineet Bhatnagar, MD of PhillipCapital.


In an interview with CNBC-TV18, Bhatnagar delved into derivatives data and said FIIs, who have recently been dabbling on the call side, have added to their long positions.


For traders, he recommends a 'bull call spread' strategy, constructed using the 8,200 (long) call and 8,400 (short) call.

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A bull call spread, which requires an initial outlay, involves buying an in the money (or at the money) call and selling an out of money call. The strategy is used if a trader expects a breakout but it will cap the upside.

Below is the verbatim transcript of Vineet Bhatnagar's interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.

Anuj: What is the feedback, is the market heading higher in the current series or are we done for the series?

A: It is quite dramatic change in the trading tactic that we have seen from the foreign institutional investors (FIIs) from the start of this particular expiry. So you will remember that in the September expiry the long positions on the Nifty futures had come down quite dramatically as far as the FII customers segment is concerned and since then specially after the rate cut of 50 basis points (bps) by Reserve Bank of India (RBI), FIIs added very quickly as much as about a billion dollars on the Nifty long position.

Likewise they did two more things, they reduced their Nifty puts which have peaked at about USD 4.2 billion during the September volatility, that has come down to about USD 2-2.5 billion.

Also they are playing on the call side with a bull spread at 8,200-8,400 which also has moved up quite substantially.

Anuj: What explains this big index futures buying that we saw, almost 7,000 crore in the first seven-eight days and what explains the last two days of unwinding that we have started to see?

A: The unwinding perhaps is driven by the fact that there is a resistance, which the technical traders have been looking at or have been touting, which is about 8,250-8,280. Those who had initiated the positions below 8,000 perhaps wanted to take the profit from the table and unwind quickly but at the same time remember that the same set of clients or professional traders are very swift in building the long side more substantially as soon as they see the opportunity.

Sonia: What is the most appropriate strategy that one should execute from now for the rest of the October series?

A: If you are looking at the Nifty futures. It is a bull spread that you can do with 8,200 and 8,400 Calls on the Nifty but what we are looking at is a possible breakout. We have a bias for the market to breakout on the upside and therefore, those who have been looking at some of the stock selection in their portfolio, they should be looking to add now. There are still some room available in the midcap space that we are very excited about.

Reema: Where will leadership come from for the markets now because IT practically has ruled out after both Infosys and Tata Consultancy Services (TCS) fell post its earnings, what will drive the markets higher?

A: According to me, IT has been interpreted as a knee-jerk reaction. I was more excited by the commentary that came out from TCS especially after it indicated the strong growth possibility in the US and western Europe, which are the two important markets for them.

So my own reading is that down the line, a quarter or two quarters away, IT is going to drive it and the TCS continues to be our best pick.

Technically speaking TCS has not done much in terms of the price movement over the last six-eight months, but it is showing signs of a breakout. Likewise in the midcap IT space we are excited by names like NIIT. Mindtree is slated to come out with their results today. We are also quite positive about Mindtree that we will wait and see whether this quarter's or last quarter's result do reflect the optimism that we have.

Anuj: Stock of the series has been Tata Motors if you were to leave out metal stocks. What has been the feedback, is the worst over, are we set for a big rally from hereon or is this a countertrend rally?

A: There are two ways to look at it. Tata Motors continues to not break a very long-term support. It has scared of testing but never broken. So Rs 250-270 is always something that has not broken on the downside. That gives the confidence to all the bargain hunters and the positional traders as far as Tata Motors is concerned.

On the fundamental side, there is news coming in in terms of the Jaguar-LandRover (JLR) showing year-on-year (Y-o-Y) growth of about 3 percent. Jaguar is doing well and one of the data that we were looking at China was that the luxury cars and the SUVs -- a dip that we saw in August and September -- could be set for a changeover. So we understand that there was improvement in the order bookings for Mercedes, for BMW and also for JLR in China.

Sonia: You did say that there is further upside in this series, what could the upside be, what is the ceiling for the series looking like now and what do you think could be the leaders of this rally because you did mention TCS but apart from that what else?

A: The resistance or the top side comes as about 8,400. 8,400 is the Nifty target that we are looking at and as far as the leadership is concerned, we believe that in Nifty there are pockets of strength that are visible. Bank Nifty is holding on quite alright. That particular strength is something that is important for the Nifty as an index to do well because of the weightage itself, there has been rebound or a capitulation in metals space although I am not still confident about a consistent and sustainable recovery in the metal space because it has strong headwinds coming in from the weak commodity landscape in the global market place.

Also there is some confidence that we are seeing that could come about even in fast moving consumer goods (FMCG) notwithstanding the fact that Hindustan Unilever Ltd (HUL) was a bit of a dampener and ITC still does not enthuse any confidence yet. So I think it will be IT, it will be recovery in metals.

Reema: But what about the fact that domestic institutional investors (DIIs) have been sellers for the last seven straight sessions, what prompted that and how do you expect the domestic institutional investors to behave from hereon?

A: I was also questioning the same thing when I saw the number of Rs 270 crore a day before -- then FIIs were buying almost the same quantity. A good way to look at it is exactly what they did when the knife was falling. So at 7,700-7,800-7,500 the only investors who were buying in the market were the DIIs if you recollect.

So in some ways a bit of positional trading profit booking is something that could be out there but I would imagine that the confidence by the DIIs in some ground level activity that has started becoming visible in bits and pieces is what will prompt them to come back and buy again.

Anuj: Any risk of stock futures book getting heavy especially in high beta names?

A: I think the stock futures book getting heavy is something that is always possible because we are just in the middle of the month and it is a long series in terms of the number of days so it is quite possible as to how it will turnout over the next couple of weeks.

However, we are still leaning towards the fact that this is moving towards a breakout on the topside. So sitting today, my bias is for the long positions to continue to build, I would imagine that single stock selection whether for leveraged positions through single stock features or in the cash market is going to be the style that we will see from professional traders.

Reema: How do you expect HUL to move from hereon?

A: HUL -- as they pointed out even in their commentary after the results -- was suffering from a poor demand and we know the reasons for that. One of the prime reasons is the deficient monsoon and therefore the impact of that on the rural demand but it also suffered from a deflationary price environment so they have not been able to hold on to their gross margins at all.

Moving forward, it will only be the revival in the ground level activity in the demand, which will show some impact on a large FMCG firm like HUL. Notwithstanding the immediate prospects of HUL and ITC also, we still look at FMCG with some interest especially when it comes to names like Dabur, Jubilant Foodworks that is a consumption theme although not an FMCG or paints for that matter. So we like Berger Paints, we like AkzoNobel, which are having the underlying theme of a consumption and consumer demand.

Sonia: You spoke about 8,400 as the upside target for this market but what about the downside, what could the floor for the market be now?

A: The immediate floor for the market will be 8,000, which will be after breaking the support of 8,100 that all of us are watching and below that it could go and test the previous lows of 7,700.



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First Published on Oct 15, 2015 10:00 am
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