F&O Watch: Rollover signals further consolidation

With the uncertainty of elections behind us, markets are awaiting direction from economic policies from the government. Indices have not yet penetrated the very high trading range on the day of the election results.

NSE's CNX Nifty traded between a high of 7,563.5 and a low of 7,130.65 on the day of the results. These peaks have not yet been breached after 10 trading days. The sharp move on the day of the election has resulted in consolidation with the average trading range of the indices narrowing further with derivative roll-over approaching.

Narrowing of market movement has resulted in a sharp drop in volatility, which is presently around 16%, as compared to over 40% a few days ago.

But what is important is the mood going forward. Derivative data throws light on what market expects going forward. Within this the best gauge of the mood is roll-over data. If traders are willing to hold on to their view for a longer period of time they would roll over their derivative position. There should off course enough liquidity in the new month for traders to roll over their positions. If on the other hand they feel they have waited long enough, they would prefer to square off their position.

Rollover data from the month of May to June gives an impression that consolidation is expected to continue in the broad market. There is no urgency seen in traders taking new position in the market. Only 40% of new positions have been created in Nifty futures for June as compared to the overall open interest.

However, as is generally the case, action is visible in individual stocks. Maximum permissible limit of 95% of open interest has been reached in Unitech and HDIL. Strong rollover is being witnessed in Adani group shares with Adani Enterprises witnessing a 83% increase in open interest and Adani Ports a 74% increase.

Jain Irrigation and IB Real Estate are the other counters which are witnessing above average build up of position.
Banking counters, especially public sector banks continue to see a build up in  their position, while there is less interest in build up in defensives like FMCG and pharmaceuticals.

 
In short the trend continues as what was visible over the last few days, but the real direction in the market will come ones the election results day peaks are taking off. Currently, markets are sliding slowly towards the lower end of the range and might attempt to test it before a move higher.

A pre-budget rally can take the previous peak off, but for that to happen there is no visible signs yet on the derivatives scanner. Not too much interest is visible in frontline stocks which can take the indices higher. A subdued volatility index also does not throw much light on the move forward nor does a low put call ratio. Further consolidation is the only message that can be inferred from derivative data.