Derivatives: Outlook appears bearish

Market appears oversold, but the mood has remains bearish in the absence of any positive trigger, index can correct further before consolidating; global cues remain a key factor

Extremely bleak global markets kept the domestic benchmark S&P CNX Nifty also at lower levels with significant correction witnessed all through out the week. Although the market was open on Saturday for around 90 minutes, the data till Friday 5th February is only taken as there would be only minor interest in the F&O segment on Saturday. For the week till Friday the market corrected 163.40 points to close at 4718.65. Although on Saturday the market marginally corrected upward by 38.6 points evidently due to some short covering.

Negative global markets and benign mood emanating from the major economies has been a major reason behind the week's mayhem. The trend continues to remain negative although one gets a feeling that it is currently oversold. All throughout the week there was significant short built-up both at the nifty and stock futures, while on the nifty options front also the trend indicated bearishness.

All throughout the week the nifty future closed at a discount to the underlying and the average volume in the F&O space remained higher at Rs 76061.19 crore. For the full week under review, the nifty February future added 14.53 lakh shares in open interest to take the total OI on Friday to 3.14 crore shares. Most of the front-line stock futures also added OI evidently due to short built-up. For e.g. Reliance February futures added 8.66 lakh shares in OI while Tata Steel and Tata Motors added 31.11 lakh shares and 3.13 lakh shares in OI during the week ended 5th February 2010. Now in these situations when the market appears oversold, any positive news flow either domestically or globally may induce significant short covering, which may sharply pull back the underlying. In the absence of any positive news, the market appears bearish.

Overall the market wide OI on Friday stood at 189.74 crore shares, thus rising by 2.32 crore shares as compared to the previous day. Major activity was witnessed in the stock futures & options segment.

Extremely bearish scenarios were evident in the nifty option front where the most active strikes were the 4600 & 4700 calls besides 4400, 4800 and 4900 puts. Aggressive call writing was witnessed at the 4600 and up strikes, while puts were bought at the 4700 and below strikes. The surprising was the activity at the 4400 strike put which added significant buying. These are flat negative indicators suggesting further downward pull.

On Friday, 5th February 2010 the OI of 4600 and 4700 call increased by 5.75 lakh shares and 10.88 lakh shares respectively to take their total OI to 6.61 lakh shares and 20.03 lakh shares respectively. The 4700 strike put added 9.36 lakh shares in OI while the 4400 put witnessed addition of 12.47 lakh shares in OI on Friday

The market may seem oversold at this level but in the absence of any positive trigger, the mood remains bearish. It looks as though that there is further correction left before the index consolidated at some level. The mood in the global market will remain a key factor in the forthcoming weeks.