Thursday, August 4, 2011

EOD Analysis for 4th August 2011 and Outlook for 5th August 2011

Nifty opened with reasonable volumes and the morning session saw Nifty futures clocking an OI of about 24 million but then after a few gyrations within a narrow trading range, the OI went to almost 25 million after Europe opened. A lot of short-covering was seen in Banknifty in the morning and at one stage it went to the crucial level of 10750 where more supply was expected but there was a short build-up over there once again and all gains were more than reversed. One can expect this to continue tomorrow as well and a turnaround to take place on Monday.

The broad range still remains 5408-5532 for August series with an occasional throw-over or throw-under. Once the monsoon session is done with in parliament and the global cues get clearer, we can start seeing some upsides after August expiry. The outlook remains unchanged as of now.

As mentioned yesterday, 1 close below 5408 would open Nifty for a retest of 5348-5280 zone. The moment 5380 levels were breached on the downside, another million of OI was added onto Nifty futures, accelerating the fall. Now we have 2 consecutive closes below 5408 and if the carnage is not arrested within 5280 levels, we could go all the way down to 5225-5177 unless Monday provides the trend reversal as expected. This is the 3rd consecutive day of fall on Nifty and 5th straight losing session from 30th July.

If we go below 5177, then the last hope for bulls will be 5092 for any meaningful upside. Today, Nifty completed a 34 day Fibo cycle from the June 20th low of 5196 in terms of trading days [sometimes the weakness extends to a day or so]

For August Series, the expiry target stands at 5480-5532 as of now with 1 possible visit to 5580 and 1 possible visit to 5280 [2 consecutive closes below 5408 can take this to 5225 levels as well].

The options data though noisy actually shows the amount of fuel added to the fire at the moment

Highest OI in 5600 CE at about 8 million and 5500 CE at 7 million. On the Puts side 5400 PE has 6.6 million OI and 5500 PE has 4.6 million OI. With all heavy weights badly badgered, one should not read too much into these options figures. IMHO, all that this is showing is that a lot of retail traders have not factored for the lesser number of trading sessions for current expiry and are buying options which option writers are happily obliging them with.

Just to get things in perspective, the 5400/5500/5600 CEs have no intrinsic value at the moment but are going for time values of 80s, 40s and 20s which is ridiculous. 5300 / 5200 PEs have 0 intrinsic values but quoting high time values again.....the sooner retail traders understand this part for August series, the better.

However, the August 5700 PE quotes are going at par with 0 time value and 5600 PE quotes are going at about a 20 point premium in the first week of the series itself! That is giving some hope of an upside to come towards the end of the third week of August

As of now, 5280-5348-5408 levels are Buy Levels for Nifty futures with targets 5440-5480
5500-5532 levels are Sell Levels for Nifty futures with targets 5440-5408

One should only use options to hedge these positions and use appropriate stop losses. For current series, a better way to hedge the position in futures is to write an option in the same direction and milk options premium. As it is, time value will erode faster in current series and there will be some flat sessions as well to rationalize this spikes up and spikes down to balance the ROC to 10 points per day.

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