With Friday’s plunge Nifty is within touching distance of the 200-day SMA, which is now in the 24,000 vicinity. FIIs Index Future Longs have seen a rise but, the proportion has sunk to 8.4% thanks to a larger rise in short positions. This is definitely a severe bearish positioning.
The last time such a similar extreme was seen in 2023, which was followed by a reversal in a few days, but reversal in the index took a few weeks to materialise. This sits well with the seasonality picture, which sees a zero percentage chance of August turning positive, given a negative July. It must also be noted that nearly 70% of the Index Future Longs are held by clients. This is close to the highest this year.
The broader market continues to sink
Nearly 60% of the Nifty 500 constituents are trading not more than 2% from the lower Bollinger Band. While small caps appear to be leading the run down, the IT sector has none of its stocks above the 200-day SMA. Meanwhile, at 66%, the Nifty PSU index has the highest percentage of constituents above the 200-day SMA.
Though Nifty is just 1.3% above its 200-day SMA, all sectors are not similarly positioned. While Nifty Bank is 4.4% above the 200-day SMA, Nifty IT is 13% below its 200-day SMA. Among sectors, the Nifty IT is the next farthest below its 200-day SMA, at 7%.
Apart from banks and financial services, the next farthest above the 200-day SMA is the Auto index, at 2.39%. That said, all major sectoral indices are trading below their respective 50-day SMAs. The Small Cap 250 index is 5% below its 50-day SMA, while the Midcap 150 Index has fallen 3.5%.
Sectoral Cues: Bearish times ahead for financial services sector?
The Nifty Financial Services Index has remained under pressure since breaking below a rising trendline in mid-June, and the downward momentum continues. This bearish setup is also evident on the monthly chart, reinforcing the overall weakness. The 14-week RSI hovers around 54, indicating that there is still room for further decline.
Major components of the index – including HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Axis Bank, which together represent nearly half of the index – are showing signs of vulnerability. Many of these stocks have either slipped below their Supertrend indicators or registered bearish MACD crossovers. SBI, however, remains relatively neutral and could provide some support. On the other hand, insurance stocks such as HDFC Life and ICICI Prudential may outperform the banking names.
From a derivatives perspective, short positions were added in 84% of F&O stocks on Friday, with 36% showing similar trends over the week, further strengthening the bearish outlook. The index is expected to find support near 25,850, but if this level is breached – especially with SBI joining the downtrend – the decline could accelerate toward 25,600.
Sectoral Cues: Energy stocks under pressure
The Nifty Energy Index has been facing downward pressure due to profit booking since July, after failing to hold above the Supertrend level of 36,270. Technical indicators point to further weakness, with the weekly MACD nearing a bearish crossover below the signal line. This suggests the index may initially drop to 33,115 and could potentially slide further to 31,000 in the short to medium term.
Looking at individual stocks, Reliance Industries – which makes up around 34% of the index—has already experienced a bearish MACD crossover on its weekly chart, indicating it may lead the decline. ONGC is also displaying similar technical weakness, adding weight to the overall bearish sentiment.
About author
The author is Anand James, Chief Market Strategist at Geojit Investments.
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