By Anand James
Insights from FII positions
FII’s positions in index futures have always come to the fore when either the longs or shorts go to extremes. But of late, they are rarely followed by serious market action partly due to lower positions held in the segment in toto or partly because of rise in retail positions.
Or it may just be because FIIs do not just go into a fight or flight mode any more, perhaps because options give better hedge positions, even as they offload their positions that end up against the market direction. Nevertheless, we now have FIIs’ positions in Index futures at their highest in 30 days, despite Friday’s sell off.
The ratio of long to shorts among index futures has come down to 64%, but this is still a high figure. What is more instructive is that longs in this segment is 22% more than what it was when Nifty approached the 24800 figure during late August.
In isolation this points to more legs to downside, given how large the index futures long positions in comparison to last month. However, what works against this argument is that the retail segment holds more shorts than FIIs now.
The odds of a crash
There is now a case being made of large declines given the sustained uptrends that has kept fresh buyers reluctant and large rallies devoid of momentum. Given this, the easiest approach would be to first play for 24000 and 49800 in Nifty and Bank Nifty respectively at least.
But it is important to note that in early August when Nifty last dipped below 24000, range expectation was quite low, with below 14. Hence the element of surprise was larger. Today, VIX is already above 15 and standard deviation is pointing to a range expectation of about 3% already, reducing the element of surprise.
This points to the possibility of either Nifty and Bank Nifty taking support from 24800-400 region and 50500-50000 region and bouncing back, or a much painful decline. Our favoured view is inclined towards VIX not taking off and key indices retiring into another phase of consolidation.
Sectoral Cues
We could possibly be looking at a short-term pull back in the Nifty Pharma index in the coming weeks. MACD histograms showing exhaustion at highs, weekly doji candle and weekly RSI near overbought region all supporting our view for a pull back.
We expect Sunpharma, Cipla, Zyduslife, Drreddy, Torntpharm, Lupin and Auropharma to push the index down as they too have formed similar exhaustion candles in the weekly time frame.
Nifty Auto Index
Nifty Bank has formed a Hanging Man candle pattern in Augustin the monthly time frame and September has started to see selling. Also, the MACD histogram has formed an exhaustion candle after 9 months which is also indicating weakness.
With monthly RSI ruling above 80, we expect a pull back in the index in coming weeks initially towards 23320 and thereafter towards 21150 levels. Four-wheeler makers like Tatamotors, M&M, Ashokley and others including Eichermotor, Heromotoco along with auto ancillary makers like Motherson, Bosch and Tiindia are expected to see profit booking.
(About The Author: Anand James is the Chief Market Strategist at Geojit Financial Services.)
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