F&O Outlook: Nifty may fall below 2,700-level

Both the benchmark indices, Nifty and Sensex, fell 3.8 per cent each, the biggest drop in almost four weeks, on account of weak global cues and profit-booking. The slide gathered momentum after European shares dropped early, according to traders.

Derivative and technical analysts are expecting the markets to see more corrections going forward. The Nifty is expected to trade in the range of 2,600-3,150 before a breakout on either side, says technical analyst Kamlesh Langote of vfmdirect.com.

“If the market revisits its October lows in the near future, we may see 800 to 1,000-point correction in Nifty, says Kamlesh.

The discount of Nifty February futures to spot index increased from six points to 30 points, while open interest declined by 1.41 million shares, indicating unwinding of long positions and build-up of fresh short positions.

Put writers were seen unwinding their positions at 2,700, 2,800 and 2,900 on expectation that the Nifty may decline below 2,700 in the near future. Traders were seen writing 2,600 strike put, indicating a support level for the index going forward.

They were seen unwinding long positions in several stocks and building up fresh short positions in banking stocks. The open interest in JP Associates, Suzlon, Unitech, RNRL, NTPC, Reliance Communication and SAIL fell between 1.6 million and 6.6 million shares each largely due to unwinding of long positions.

Axis Bank, HDFC Bank, ICICI Bank and SBI witnessed an increase in open interest with decline in prices, indicating fresh short build-up.

Siddhartha Bhamre, derivative and equity analyst at Angel Broking, says a correction is round the corner as the market is trading on the higher side of the range.

With implied volatility (IV) of around 40 per cent, options traders were buying 2,800 and 2,900 strike puts, says Bhamre. He expects Nifty to witness short-covering only around 2,500.