Indices likely to visit recent highs

The Nifty and the Sensex closed above their immediate resistance levels on short-covering and firm Asian and European markets. The positive outlook continued with both likely to revisit their recent highs. The only concern is short build-up in index and stocks futures by foreign institutional investors. Though there is no short build-up by any other futures and options (F&O) players, F&O volumes remained sluggish as participants stayed away from intra-day trading due to gap-up opening.

Nifty January futures moved in a narrow range of 20 points and closed at 5,261 on short-covering by bears. Intra-day trading data suggest that bears covered short positions when the spot Nifty moved above 5,260. In the end, January futures shed 305,950 shares in open interest, mostly through buy-side trades. Traders covered short positions in 5,000-5,200 strike calls as they expected that the index might not move below 5,200 in the near future.

The 5,300-5,400 calls saw change of hands and added fresh open interest through a blend of buy and sell trades, indicating resistance for the Nifty around its recent high of 5,311. The 5,000-5,100 puts witnessed profit-booking while 5,200 and 5,300 puts added fresh open interest through sell-side trades. This means the Nifty has strong support at 5,200 and options participants are building fresh support at 5,300.

The India VIX Index, compiled by the National Stock Exchange to measure the market’s expectation of volatility in the near term, closed at 20.98, the lowest since its launch in March 2008. While historically, these individual VIX signals have worked 60-70 per cent of the time, this is no longer the case. Whenever a system or a strategy becomes known to too many people, it often fails to give the results it has given in the past.

For example, in the current bull run since March 9, 2009, the VIX rose to an all-time high of 84 on May 25, 2009, after the Congress won the general elections. The Nifty moved up from 4,100 to over 5,000 by the end of September 2009. This falsified analysts’ perception that a high VIX means that the fear is high.

Historical data points in in-the-money and at-the-money calls and puts suggest that the market moves up meaningfully on high volatility if traders are buying call options and goes down substantially if they are buying put options. In the current situations, the market is saddled with low volumes on account of lack of interest at current levels. The market is neither overbought nor oversold and so the India VIX is trading fearlessly.