Don’t get aggressive for any leverage trading position as volatility is too high

Chandan Taparia

March 13 was a historic day for the Indian markets as Nifty hit the lower circuit after 12 years and then rallied sharply above the 10,000 mark.

At the opening, it was mayhem on Dalal street. But the sentiments were revived after the market's reopening.

The index recovered on the back of strong buying from DIIs, bargain hunting from long term portfolio investors, some hope of recovery in global bourses and short covering in many beaten down oversold stocks.

Chandan Taparia

Vice President and Analyst-Derivatives|Motilal Oswal Financial Services

• 'Nervousness from FIIs suggests weak structure prevails in market'

• 'Traders should avoid bottom fishing as it is harmful to catch a falling knife'

• Option traders can initiate Bull Call Ladder Spread in Nifty to gain benefit in expiry week

As a result, Nifty rallied by around 20 percent from lower levels and formed a Bullish candle on the daily scale with a bigger real body and lower shadow.

Momentum Oscillator RSI turned northward from the deep oversold territory and thus showing some sign of relief for bulls.

Now, Nifty has to continue to hold above 9,400 zones to witness a bounce back move towards 10,333 and 10,650 zones; while key support exists at 9,400 then 9,100 zones.

However, traders are advised to remain light on positions as volatility is at multi-years high across the globe.

India VIX moved up by 100.74 percent from 25.64 to 51.47 levels on a weekly basis. VIX is at 11 years high and during the last session, it even made a high of 59.48 marks.

Higher volatility could keep the market under pressure and a roller coaster ride could continue to keep traders in tension till it does not cool off from its historical decade-high zones.

On the options front, maximum Call OI is at 12,000 then 10,000 strike while Maximum Put OI is at 9,000 then 9,500 strike.

Option OI data is scattered and shifted at various strikes as many Put writers got trapped in recent market fall and even unwinding pressure could keep the street under the pressure.

Call writing is seen at a 9,500 strike while Put writing is seen at 8,500 then 9,000 strike and even sliding lower day by day with the lower market range.

Options data indicates a shift in a wider trading range between 9,500 to 10,500 zones.

Bank Nifty opened the gap down on Friday and then further drifted lower in the initial trades.

However, it recovered by more than 4,000 points from its intraday lows, which is the biggest intraday recovery in the history of the rate-sensitive index.

It formed a big Bullish body candle on the daily chart and if we combine price action of the last two days, then we are witnessing Bullish Engulfing kind of pattern on a daily scale.

We saw strong buying interest in both PSU and private banking indices from lower levels, which helped the Bank Nifty to outperform the benchmark index.

It is rebounding from its oversold territory on both daily and weekly chart, indicating possibility of a pull-back move in coming days.

However, traders are advised to remain cautious till the market does not settle this dust. Going forward, immediate resistance is placed at 26,250 and then 26,600 levels; while support could be seen around 24,250 and 23,500 levels.

Stock specific it would be tough to trade the stock with lesser trading stop loss as volatility of most of the stocks and indices surged higher.

We believe that long term traders can grab this opportunity to at least start their new portfolio or SIP.

We have seen a decent recovery in the market from lower levels on Friday but volatile swing cannot be ruled out.

One can look for stocks like Hindustan Unilever, Escorts, Bharti Airtel, ICICI Bank for bottom fishing approach while weakness could continue in most of the auto, capital good, metal and small and mid-cap stocks.

Don’t go aggressive for any kind of leverage trading position or adopt the wait and watch mode till the market does not settle this dust.

Option traders cannot be with buying option as premiums are much high and higher VIX beyond decade highs does not allow for Option selling as well so the best way is to go with the Option Spread to deal with such market to play the weakness or any kind of short term bounce.

(The author is Vice President and Analyst-Derivatives, Motilal Oswal Financial Services Limited)