Nifty to face resistance around 5500

On A day which saw heavy declines in IT stocks post Infosys results, with the CNXIT dropping over 2.5% for the day, Nifty continued to trade strong, finally closing at 5400 for the first time in almost two-and-a-half years.

On a comparative basis, Indian market has shown great tenacity in staying at a new recent high while most global indices are just recovering from their lows. In this respect, Indian implied volatilities (IVs), too, have been on a relative downtrend when compared with the US VIX, thus indicating lower risk being attached to India as against the US.

This is an unusual scenario because, in general, in a rising equity-risk aversion scenario, an emerging market like India sees a higher beta and, hence, greater volatility. This is indicative of the inherent strength of Indian equities and suggests that India may continue to outperform developed markets equities.

This is once again substantiated by the fact that the FIIs have been buying into Indian equities aggressively and have already bought over $3.3 billion this financial year. They, however, have been making good use of low volatilities and have been hedging their cash market purchases with heavy buying in index options. The current levels of sub-16% for ATMs, the downside for Nifty IVs is extremely limited and hence one should look to either take exposure through options or make good use of them to hedge the long positions.

Nifty is likely to face resistance around the 5500 mark, with more than 10 million shares standing as open interest in 5500 strike call; 5300 is going to be a strong support on the way down. We expect Reliance to outperform Nifty.

Gaurav Mehta, Derivatives Analyst, Ambit Capital