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Sell Nifty 5300 CE, 5100 PE of July series: Nirmal Bang
21 Jul 2012 02:00 PM
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In the previous fortnight, few companies announced their earnings for the first quarter. While most of them were in line with market expectations, IT bellwether Infosys announced a negative guideline, which resulted in more than 8% loss in its stock on the day the earnings result was announced. However, Tata Consultancy Services offered hope to the market with a better-than-expected Q1 FY13 result.

Also, the government declared a better-than-expected May Index of Industrial Production (IIP) data of 2.4%, which was driven by 2.5% growth in manufacturing in May due to the base effect. Another important aspect in the May IIP was a mere 0.1% month-on-month growth in consumer non-durables, which is a cause of concern because growth in consumer non-durables reflects the basic consumption demand in the economy. Another negative aspect deduced from IIP numbers is that 10 out of the 22 industry groups showed a year-on-year decline in May.

The monetary policy review to be announced by the Reserve Bank of India at the end of 31st July will be an important event for the markets. The June inflation data may influence the monetary policy.

Talking about markets, the Nifty futures already gained 1.7% in the first half of the July expiry on the back of around 4% increase in the June expiry. The markets had, however, lost around 5% in the May expiry due to weak European cues.

The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been hovering around the range of 1.24-1.12 since the start of the July expiry, suggesting a range-bound scenario for the market, dominated by Options sellers. One can expect the PCR-OI to stabilize at current levels and remain range-bound between 0.95-1.3 in the days to come.

On the Options side, the highest build up for Calls as well as Putsstands at 5,000-5,400 (current market price at 5,240 as on 13th July) for the July series, indicating that the markets will expire between these levels for the July expiry scheduled on 26th July.

An interesting aspect worth noticing in Options these days is the Volatility Index (VIX), which is nearly in the new range of 17-20. This implies that Options traders are not expecting much risk or downside in the markets. Going forward, we expect the VIX to stabilize at current levels and the markets to not breach the level of 5,000 in the coming days.

Technically, the Index recently formed a series of higher tops and bottoms, which is a bullish Dow signal. There is an immediate resistance at the 5,320-5,350 levels on the upside and support resides at the 5,200-5,180 levels. The oscillator situation suggests the presence of a negative divergence pattern.

However, there is insufficient evidence for any top and, we therefore conclude that the advance is not done yet. The Index has also managed to close above the falling trend line drawn from the highs of March 12, which is a bullish signal.

Currently, the Index is trading above its 100 and 200 day Simple Moving Average. If it sustains above the 5,220 level and the rising window pattern that was formed in the recent trading session would confirm the ongoing short-term uptrend.

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 rises from the lows of June 12 in the index has been accompanied by a sharp rise in volumes and breath, which is a bullish signal. Of course, we do need to see the follow through price action in case the rise has to continue further.

The short-term up trend remains intact until the aforementioned support level is breached decisively. The weekly chart has formed a spinning top pattern, which indicates some ranging action in the near term.

The Bank Nifty faces strong resistancearound the 10,750 level on the upside where selling pressure is expected. One should maintain a positive bias only on close above this for an upside potential of 10,850 and 11,000 levels. There is an immediate support at 10,520-10,480 levels on the downside.

The cement sector has outperformed the broader index and we maintain a positive bias in ACC, Ambuja and Ultratech for an upside of 10% to 15% from current levels.

Strategy for July Expiry

Short Strangle on Nifty: It can be initiated by selling 5300 Call and 5100 Put of July series. The net premium inflow comes around Rs 45-50, which is also the maximum profit if the Nifty July series expires between 5100-5300. The loss remains unlimited beyond the break-even range of 5350-5050.

Source: Nirmal Bang's Beyond Market

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#Nirmal Bang #Beyond Market #Strangle #Nifty #Tata Consultancy Services #IIP #TCS #Reserve Bank of India #monetary policy #inflation #Put Call Ratio #Open Interest #PCR #OI #Calls #Puts #VIX #Volatility Index #Options #Bank Nifty #ACC #Ambuja #Ultratech
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