Moneycontrol
Last Updated : Mar 10, 2019 08:11 AM IST | Source: Moneycontrol.com

Options data suggests probability of Nifty50 moving towards 11,500 is higher

Open interest addition is well distributed in 28000 Call and 27500 Put indicating a possible consolidation in coming days.

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Amit Gupta

The Nifty recovered during the week and seems to be gaining strength as we enter into the General Elections. Short covering is seen in the broader markets, which is an encouraging sign.

This is where this upmove is different from the other attempts seen towards the 11,000 level in the last four months. We believe that the Nifty can move up to 11,500 as positions in Call options are shifting to this strike.

Volatility has started cooling off from 20 percent after the relief seen across cross-border tensions between India and Pakistan. Market participants are utilizing this decline in volatility by writing Put options.

PCR-OI of Nifty has reached 1.76 levels on the back of higher Put additions. These positions will benefit from a stable or upward moving market.

The Midcap index seems to be outperforming the Nifty. So far, even laggard Nifty components from oil marketing, cement, capital goods and PSU banking have started performing, which is quite a healthy sign.

The rupee has appreciated despite a dollar upmove after the European Central Bank (ECB) meeting. Rupee appreciation is supported by stable domestic macros, which has been contributed majorly by lower crude prices.

Technology and pharma spaces have come under pressure due to current rupee appreciation. The decline in IT majors has been compensated by banking heavyweights.

Thus, the market seems to be absorbing any negative news flow. Hence, it may witness a good short covering trend.

Bank Nifty: Level of 27,500 remains strong support for upside to continue

The outperformance was seen in banking stocks, which pulled the Bank Nifty from 27,000 to 27,800 along with broad-based participation

Both private and public banks attracted buying where Axis Bank and HDFC Bank were the leaders in the private space along with participation from most PSU banks.

The Bank Nifty has started the March series with lower OI positions. We feel selling pressure may not be there given such lower OI base while participation can be seen on the positive side.

The current price ratio of Bank Nifty/Nifty has finally managed to move above 2.51 levels after a few months of consolidation.

We expect short covering to be seen above 28,000, which is likely to take the ratio higher. However, in case of underperformance, the ratio is likely to find support near 2.48.

Open interest addition is well distributed in 28,000 Call and 27,500 Put indicating a possible consolidation in coming days.

However, the weekly VWAP levels of 27,500 are likely to provide a cushion to the index. Once it manages to end above 28,000, further upsides can be seen

Euro weakness to destabilise recovery in some fragile emerging markets (EMs):

Weak data emanating from the US and European markets set the tone for equity markets. The S&P was down over two percent during the week while Europe and EMs were down over one percent as well.

Hence, the first week of March has broadly saw some profit taking trend after a strong performance in the first two months of 2019.

The fund flow picture remained weak in most EMs. Outflows were in the vicinity of $541 million and $431 million in Taiwan and South Korea, respectively. Thailand and Malaysia saw outflows in the vicinity of $200 million each as well.

Global markets are now focusing on a dovish surprise from the ECB. Markets had expected the ECB to announce a new round of targeted longer-term refinancing operations (TLTROs) and to change its interest rate guidance at some point over the coming months – but not necessarily in a meeting held in the week gone by.

In the March policy, the ECB opted (unanimously) to do both in response to a markedly weaker set of economic forecasts, which marks a dovish move by the ECB.

It not only pushed out the period over which it intends to keep rates on hold (at least through the end of 2019, vs the end of the summer in its previous guidance) but also announced a third round of targeted long-term repo operations (TLTRO-III)

Implications of the move:

(a) For currency: Currencies would again be used to induce inflation. Hence, another leg of the forex war is now a possibility. A weaker Euro implies a stronger dollar story and may impact CAD deficit countries like Argentina, South Africa, Turkey.

(b) For bonds: On the back of slower growth forecast and a dovish assessment, the German yield curve has collapsed. The US front end is also a bid and the US curve is likely to steepen.

(c) For India: The impact on India is limited as the rupee did not see any sharp appreciation in trailing two months and, hence, a lower scope sharp depreciation.

As CAD fears have abated and FII buying in equity has resumed, we expect the rate market to remain insulated. (d) for dollar index dash to 100 is the biggest risk.

The base case remains of an unlikely dash to 100, but lower short Euro CFTC data suggests underprepared of the market. Hence, FII fund flow into EMs is likely to halt till there is more clarity on dollar direction.

(The author is Head of Derivatives from ICICIdirect)

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Mar 10, 2019 08:11 am
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