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Nifty shorts still intact, avoid contra bets until any reversal signs emerge; support in 16500-16400 range

India VIX is hovering around 20 levels which is in its comfort zone, however, given the uncertainty, one should keep a tab on the same as a move above 23-24 is likely to be negative for the markets.

Data is bearish and one should avoid contra bets until any reversal signs are seen.

By Ruchit Jain

Nifty started the May series on a low open interest base and the stronger hands (FIIs) had rolled more short positions in the index futures segment. At the start of the new series, we did not witness any long formations as market participants were awaiting a decisive breakout beyond the recent consolidation range of 16800-17400. The U. S. Fed meet outcome was scheduled on Wednesday evening and it was anticipated that this event could lead to some conclusive breakout in the index. However, ahead of the expiry day, RBI came out with a surprise rate hike of 40 bps and this led to a sell-off in Nifty as well as Bank Nifty. 

The indices recovered at open on Thursday on the back of positive global cues, but the markets did not sustain at higher levels and ultimately corrected at the end. We have seen short formation in both Nifty as well as Bank Nifty futures on Wednesday and those shorts are still intact. FIIs started the May series with short positions in the index futures segment and they have added more shorts post expiry. Their ‘Long Short Ratio’ sneaked below 25% which is one of the lowest seen in recent times. India VIX is hovering around 20 levels which is in its comfort zone, however, given the uncertainty, one should keep a tab on the same as a move above 23-24 is likely to be negative for the markets. In the options segment, 17000 call option have decent open interest build up, indicating limited upside on pullback moves. The put options do not have a significant open interest as of now hinting that options writers are more focused on writing call options. 

If we look at the sectoral indices, most of the sectors have seen a sell-off with the short formation in many individual heavyweights. Thus, the data is bearish and one should avoid contra bets until any reversal signs are seen. Since FIIs have much of their positions on the short side in index futures, any covering from them could be the leading signs of reversal and hence traders are advised to track the same.   The immediate support for Nifty is placed in the range of 16500-16400 followed by 16100-16000 range while 16800 – 17000 is the immediate resistance range.

(Ruchit Jain is the Lead – Research, 5paisa.com. Views expressed are the author’s own. Please consult your financial advisor before investing.)

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