Nifty not likely to break past all time highs

Argument – Commodities prices are falling, inflation rate diving down, RBI to cut rates, Indian growth story still not dead, Nifty to break all time highs and venture into unseen territories.

Expectation – Stocks that are based on Indian growth story to move into uncharted territories.

Reality – Leaving apart the defensive's and most of which (leaving apart FMCG stocks) do not rely on Indian growth story venturing into uncharted territories

Further observation – If the Pharma, IT, FMCG companies are trading at all time highs they might be because they are not expensive when related to the growth potential. But that doesn’t stand to be the case, they have given whopping returns in the past and have been running atop on future expectations already built in. The stocks trade at PE of above 40’s and even 70's (Trailing 12 months) and the growth potential seems to be weakening. What the reason could be? Obvious reason seems, institutional investors want returns for their investors, being trading others money they can be greedy but not fearful of loosing the hard earned money. In search of returns they venture out buying stocks which are holding the cash in their balance sheets. The Pharma, IT, FMCG fit the bill.

Conclusion – Nifty likely to be rangebound in short to middle term unless and until growth stocks start moving up. Till then it’s a market wherein institutional investors and the Govt wont let the market fall, while the market itself lags the energy to move up.

Nifty moving out towards 5400

I think its time for me to eat my own words. As wrote by me in the previous post wherein I quoted that breaking past 5250 looks quiet impossible for Nifty seems to be going wrong. Nifty might break past 5200 and have a go at 5400 wherein lies the 200 days SMA (Simple moving average). The change of attitude is due to the moments in the Dow Industrial average which has just tested the 200 days SMA (Simple moving average). Leaving apart the Hangseng index of the Hongkong, all the other world stock  markets seem to be moving out of the rangebound movements they experienced in last 3 months. But any chance above 5400 seems quiet dim this year. On the other hand its quiet likely that Nifty might still not break past 5200, but it’s the least probable scenario. So then how to trade?

Nifty 5000 PE (Put European) Option quoting at 52/- while Nifty 5400 CE (Call European) quoting at 47/- could be bought in a pair making a cost of around 100/-. If the Nifty hits 5400 in the next 5-7 days, 5400 CE could be sold out at 130 or so, this is because Nifty 5200 CE (Call European) is currently quoting at 139, if Nifty moves up by 200 points, 5400 could be at strike and could be fetching around 130. At that point 5400 CE could be sold off and we could wait for the Nifty to yet again correct by some 200 points and Nifty 5000 PE then could be sold off at around 30/-. The whole deal could fetch you more than 50% returns in just a matter of half a month.

On the other hand if Nifty breaks down by 200 points then it would be ideal to square off Nifty 5000 PE at around 100/- and wait for Nifty to bounce yet again at 5200 so that Nifty 5200 CE could fetch around 25/- the whole deal could yet again fetch 25% returns. Lastly if nothing of this sort happens the premium might drop by some 13-17 Rs in the next 8 days, at which point it would be an exit point with around 20% negative returns.

Can your Investment gain 2000% within a month?

I am not from Zimbabwe to say that my investment of 1 dollar (Zimbabwean Dollar) at the start of the month would fetch me more than 21 dollars at the end of month, nor this is published from the book authored by me from a mental asylum. Also this can happen when most of the asset prices you see around you have seen a cut in prices increasing your purchasing power too. This is possible due to a Financial Instrument called Option, It is a form of Derivative (a thing which derives its value from something else, which we call underlying asset), there are two variants, a Put Option (PE and PA) and a Call Option (CE and CA), when the prices of the asset deflate, investment in a put option on that asset is profitable while when prices of an asset inflate, investment in a call option on that asset inflate. Now here are some examples wherein you could have seen your investment grow by 2000% in just a matter of some days if you would have being able to identify the trend before hand by using technical analysis, If you want to learn all this subsribe through paypal buttons at the top of the page, for any queries you can contact click_dotcom@rediffmail.com.

A Put Option Contract on Nifty having a strike price of 3800 and set to expire to 30th October 2008 was quoting at a day low price of 53/- Rs on 22nd September 2008, on 24th October 2008, the same 58 Rs invested were attracting buyers at a day high price of 1298.8/- Rs.

A Call Option which gave the holder, right to buy Nifty at 4000 until 28th May 2009, was quoting at 12/- Rs on 28th April 2009, when the markets opened on 19th May 2009, the same investment could be exchanged for cash at a price of 572.85, which was the day high for the contract.

An investment made in Nifty Put Option for 31st January 2008 Expiry having a strike price 5700 would have cost you 28.1/- Rs on 15th January 2008, if you would have purchased it at that days low, the same investment could be offset for 1310/- Rs on 22nd January.

3/- Rs invested in Nifty Put Option having a strike price 3200 and expiry date 25th April 2006 would have made you rich by 317/- Rs on 22nd May 2006

Nifty Day Forward (24th December, 1.35 pm)

Nifty after languishing for most part of the day in the positive territory has just as of my writing dipped into negative territory, this is the 4th time in the day that it has dipped into the negative territory but has everytime managed to pull back, yesterday the nifty never gave substantial corrections to the intraday up move now and thus unless it gives some sort of correction or atleast consolidation further upmove doesn’t looks to be materializing, hence there are 4 possibilities

1) Nifty might trade as down as 5080 (35% Probability)

2) Nifty would attract buyers at 5115 – 5120 (35% Probability)

3) Nifty would rather remain quiet (15% probability)

4) Nifty would manage to trade at 5175 (5% probability)

Option Open Interest Movement and Nifty Fluctuations

In the Futures & Options Month i.e From September 25th 2009 – October 29th 2009, Nifty traded from the high of 5181 to the low of 4738 and finally closed at 4750, in the previous month i.e on September 24th 2009 Nifty closed at 4986, Now lets see how the Open Interest in various Options built up, and how the Nifty fluctuate when the open interest started subsiding

1) Nifty 5100 PE Option

Nifty 5100 PE option saw the highest built up on 17th October, Open interest stood at above 37 Lakh, Nifty saw its highest closing for the month on the same day, Open interest in Nifty 5100 PE which was above 8 lakhs on 6th October saw open interest built up above 37 Lakhs on 17th October, 5100 PE saw a high price of 232.65 and a low price of 61 when this built up took place, on the other hand when the Open Interest started decreasing from 20th October to 29th October, to settle at just below 7 Lakh option interest, the Option traded between a low of 46.1 to a high of 353.05

Conclusion when there is an built up in Open Interest normally prices of the option move down and when the Open interest starts cooling down the prices starts moving up, the option tends to trade between the prices it traded when it saw open interest built up till the same level of open interest is not reached again, we can conclude the same from other options listed below

2) Nifty 5000 PE

Open Interest in this option stood at just below 6 Lakhs on 18th September 2009, the option saw the highest built up on 17th October 2009, it was above 51 Lakhs, in this period it traded between a high price of 210 and a low price of 35.05, further on the open interest started decreasing and on settlement stood above 8.6 Lakhs and the contract saw its high price of 250 on the same day, the low price in the period between 20th October to 29th October was 25.10

3) Nifty 4900 PE

On 16th October 2009 this option saw a highest built up of Open Interest which stood at above 70 Lakhs, as of 18th September 2009 this Open interest just stood at just below 8 Lakhs, in the meantime it traded between a high price of 135.95 to a low price of 19.10, when the open interest started subsiding it started gaining price and saw a high price of 150 on expiry i.e 29th October 2009, in the period between 20th October 2009 to 29th October 2009 it registered a low price of 12.10, and the open interest on expiry stood at just above 13 lakhs

In my further post I will deliberate on what the current conditions are and also how we can increase the chances of a successful trade using open interest as one of the mechanism

How to trade index and stock options of December expiry?

DLF seems to be quite bearish as the real sector seems to have lost favor with the investors, inspite of property prices not dropping to a bigger extent in India as compared to the globe. But would the downtrend achieve its target in short frame of time, to give profits on investment in put options, DLF could trade at 310 and if possible dip to 260 by the year end, with a stoploss at 372, a short sell position could be initiated in this stock, if 310 is considered to be the target the risk reward ratio doesn’t justify disinvestment in DLF, the option contracts of december expiry seem to be quite expensive as the 310 PA is trading at close to 9.5 Rs, the strike price 310 is more than 11% out of the money and the premium stands at close to 3% of the Last Traded Price of the stock.

ONGC is another stock whose charts give a feeling that distribution is underway, should the stock not have bidders above the price of 1190 and generate enough sell orders to have bid prices even below 1120, the stock prices could weaken further and by the year end a bid price of 972 on the stock could find a place in the best 5 buy orders, so keeping a stoploss of 1190 the stock could be sold and the square order could be 1000 or below. The options on the underlying stock dont attract traders and as such is hugely illiquid, The December expiry contract with a strike price of 1050 which has the last traded price of 12.25 is trading at a fair value, if the downside target of 972 turns out be the Last Traded Price for the stock on any day upto 31st December, the 1050 PA could be offsetted at 80 Rs/-, close to 500% return on investment, The lot size of the contract is 225, so the total cost of investment stands at below 3000/-

NTPC just like ONGC is in a distribution phase, if the stock continuously attracts supply from the distributors so that there is no bid for the stock at a price of 209 which is just 0.5% away from the current close, or if this seems to be a quite close call, the best buy order on the stock, if it is not able to surplus 213 then the scarcity of the buyers might see an investor bidding on the stock for just above 190 or even 182 by the year end. The December expiry Put Option on the stock for the strike price of 200 was last trade at 2.5, which is a fair price if the stock opens without change on Monday, the investment of 4000 as the lot size of the contract is 1600 and can make the investor double happier as the investment could return double the initial investment if the scarcity of the bidders see the price plummet to our initial target of 192.

Options on Stocks are illiquid, hence utmost care should be taken while executing them, I am advising mostly sell as the Nifty looks to be in a distribution phase, after the initial euphoria which saw the index give more than 75% return to the investor who invested at March 2009 low which was the testing of the October 2008 low, the velocity of bullishness is decreasing although the index is making new highs after the smaller corrections of 5-12%, so the index might (if the history repeats itself) atleast correct 50% of the March 2009 to the October 2010 gains, 50% of 2500 to 5200 stands at 1350 which means investors might bid for the stocks composing the index in such a way that the Nifty Index on the trading terminal reflects the value of Nifty to be at 3850 in the coming time, The stocks composing Nifty index could not find sufficient investors bidding at higher prices and the stock market had to be closed for 1 hour in May 2004 due to the index hitting lower circuit, the lack of investors bidding saw the history repeat itself in May 2006 and January 2008, could we have one now again or in January 2010. If the investors don’t bid the stocks composing the Nifty index in such a way that Nifty trades above 4988 (or 5200 the next stoploss) then the deficiency of buyers in the stocks composing the Nifty index could see the index trade at 3850 by the year end or the first month of the next year.

Nifty November Trade

Nifty closed @ 4750 at the F&O Settlement of the previous month, from that point forwards it has traded below 4750 for 4 days and closed 3 days below it, on the other hand for 5days (excluding today) it has closed above 4750, Nifty has traded in the November F&O from a low of 4538 to an high of 5012, which makes up close to 10% and normally Nifty doesn’t move more than 10-13% in a month, excluding times of high volatility when the difference between the highs and lows for the months accounts to about 30-40% of the value of the Nifty, So one can except a strong resistance close to 5020 for the Nifty in the November settlement, on the other hand the Nifty is currently trading above the 20 days simple moving average which should be considered as bullish, also all the short term averages are place above each other which too is bullish, Also there are only about to 37 days trading left in this year and normally nifty tends to close the year near about high if it has traded for most part near the high, so what to trade, it would be better to buy puts intraday near the 5012 and exit on an intraday dip of 50-70 points, or the trade could be to sell Nifty 5000 CE close to 80 and hedge it with Nifty 5200 CE close to 20 with max gains of 60 and max loss of 140 or the position could be squared of if the Nifty trades above 5052.

Sorry Readers, it seems my expectations as posted in http://niftywhatcanhappen.blogspot.com/2009/02/can-sensex-trade-above-123k-by-mid.html are wrong, 2850 on the Nifty needed to be held for Nifty to move upto 3600 by Mid March, but since 2850 is broken and since Nifty has even broken 2820, Nifty seems to be heading towards 1800 by April end, well there are two options for the Nifty right now either it recovers and trades above 2850 which then could take it upto 3600 by mid March or it trades constantly below 2850 targeting 1800 by April end, the best trade is Buying Nifty March PE 2500 Options till its below 2850 some 3100 Nifty CE for March could be used as a hedge, ratio cud be for every 2 Nifty PE 2500 1 3100 CE cud be bought, While if it breaks above 2850 one 2500 PE could be sold at loss and one 3100 CE could be added, Also if 3600 is to be achieved its has to be done within next 20 – 25 days, including today, if not no chance, while if 1800 is to be achieved 2300 on the Nifty should come by March end, Strong positive or negative movement is likely, substantially low chances of range bound trade.

Now that since I am concluding by my Technical Analysis that Sensex should hit 12.3k and trade above that by Mid March which concludes Nifty Should be trading above 3600 by Mid March, so lets check if the Nifty Components have enough strength to Pull the Nifty above 3600

Reliance currently trading close to 1400, weightage in Nifty 12%, 1650 – 1690 looks at the max possible on the counter, which transpires into close to 20% gains from current position, so Reliance can add at the max 2.4% gains to the Nifty

ONGC currently trading at close to 710, weightage in Nifty 8.35%, anything above 780 – 800 looks far fetched on the counter, so ONGC can add about 1% to the Nifty

Bharti which is trading close to 660 at this moment has a weightage of close to 7% on the Nifty, 750 – 780 looks the best possible for the counter, which transpires in Bharti adding 1.2% to the Nifty

NTPC which is trading close to 183 right now, has a weightage of close to 8.5% on the Nifty, 190 which the counter touched 4-5 days earlier is a strong resistance, breaking which 220 looks possible, but 220 takes it into a bull market, while the whole Emerging Markets Space looks as it is in Great Depression, also NTPC has not closed at or nearby 112 after touching it in October 2008, anyhow for our purpose let say at 210 - 220 it will add 1.5% to the Nifty

BHEL currently trading close to 1415, commands a weightage of close to 3.75%, anything above 1600 looks overstretched on the counter, hence BHEL can add 0.5% to the Nifty

Infosys trading close to 1310, the counter can bounce max up to 1550, With a weightage of above 4%, the counter can add 0.6% to the Nifty

SBI trading close to 1180, an ask price of 1400 on the counter is possible, while very few chances of the counter touching 1600 look possible, with a weightage of above 4%, At 1400 the counter would add 0.6% to the Nifty

Uptil Now close to 50% of weightage is consumed and close to 8% could be added to the Nifty, Lets see how the counters commanding 2-3% Weightage look

HDFC with a weightage of 2.38% and currently trading close to 1540, looks overstretched above 1900, so it can add 0.5% to the Nifty

HDFC Bank with a weightage of 2.22% is trading currently at close to 950, 1100 or at the best 1200 is possible on the counter, which transpires in gains of 0.5%

TCS currently ruling at close to 515 command a weightage of close to 2.75%, can head up to 650 or 670, adding into 0.6% to the Nifty

Wipro trading close to 225 and commanding weightage 1.8% can head upto 300, transpiring into gains of 0.6% to the Nifty

Sail currently trading at 88 with a weightage 2% can have an ask price of at the best 115, which adds in 0.7% to the Nifty

RPL trading close to 88 with a weightage of 2.17% looks poised for 105 at the best, adding up 0.4% gains to the Nifty

Hence HDFC, HDFC Bank, Wipro, TCS, Sail, RPL which combined have 15% weightage can add upto 2.5% to the Nifty

HLL and ITC have combine wieghtage of close to 7.5% and have all time highs about 20 – 25% above from there Current Market Price, lets hope they trade 10-15% higher from here, transpiring into about 1% gains for the Nifty

So this 14 Scrips with 72 – 75% weightage in between them can add upto 12% gains for the Nifty, now that Nifty is trading close to 2950 and target is above 3600 transpires into 22-23% gains for the Nifty from current level, implying that the remaining 36 counters with combines weightage of 25% between them have to post close to 10% Gains for the Nifty, Again RCOM and DLF are making new lows each and every time Nifty Corrects and have weightage of about 3.5% between them, So all in all ICICI Bank, Relinfra, Tata Motors, Tata Steel, Suzlon, Hindalco, Idea, Sterlite which have beared the most brunt of the collapse would have to post big gains for the Nifty to trade above 3600.