Bearish bites in Jan rollover, but a glimmer of hope sparks for Feb

Bulls may come back in February

The Nifty fell 1.96 percent during the January series expiry. Nifty futures rollover stood at 81.28 percent, which is higher compared to last month's expiry rollover of 79.54 percent and its three/six/nine months average of 78.13 percent, 78.60 percent & 78.20 percent respectively. Rollover is a process of carry forwarding an existing position from one month to another month. A high rollover indicates a strong sentiment while a lower rollover is usually considered as a sign of weak sentiment.

The Nifty will start the February series with an open interest (OI) of 1.28 crore shares compared to an OI of 1.38 crore shares at the beginning of the January series. Nifty saw a higher rollover with a higher cost of carry (+0.74 percent) and a fall in open interest, compared to its previous month, indicating unwinding or liquidation of long positions in January series.

India VIX, known as the fear indicator, started with 15.14 and made a low of 11.78 on January 15 as the volatility cooled off, giving major comfort to the bulls. During the period, Nifty rose and made an all-time high of 22,124 on January 16. The volatility started to rise again and Nifty came under massive selling pressure since then, falling 3.48 percent from the highs to close at 21,353 on the last day of the January series. The India VIX settled at 13.86 on January 25, 2024.

The foreign portfolio investors (FPIs) Long Short ratio stood at 69.52 percent on the first day of January series. The FPIs held relatively higher long positions compared to short positions in Index futures. Despite the price making fresh highs, the FPIs activity in Index futures remained subdued until January 16, 2024. When FPIs started to liquidate long positions, the tremors were felt in the markets.

The Long-Short ratio went below the 50 percent mark and stood at 22.00 percent on the last day of January series as the FPIs aggressively built short positions and liquidated existing long positions since January 17. They now hold more short positions relative to long positions in Index futures.

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Ashwin Ramani

Derivatives Analyst|SAMCO Securities

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The Put-Call ratio (PCR), a sentiment indicator, started with 1.54 on the first day of January series and fell until 0.66 on the last day of January series. The reading of 1.54 suggested that the market is overbought and a healthy correction can’t be ruled out. The PCR fell below 1 on January 17 for the first time since November 22, 2023 as the Call writers (bears) outplayed the Put writers throughout the January series.

On the Options front in the February monthly expiry, the 21,000 strike Put option has highest open interest with 29,08,000 contracts followed by the 20,000 strike Put option with 21,33,800 contracts. The strike prices with maximum Put open interest are the support levels. While on the Call side, the 23,000 Call has highest open interest with 30,99,600 contracts followed by the 22,000 Call strike with 18,28,150 contracts. The strike prices with maximum Call open interest are the resistance levels.

Having said that, the current market scenario reveals a low Put-Call ratio (PCR) at 0.66 and a foreign portfolio investors (FPIs) Long-Short Ratio of 22 percent, suggesting a pronounced bearish sentiment in the January series. Historical trends indicate that whenever the PCR hovers around 0.5-0.6 and the long-short ratio is in the range of 10-15 percent, the market typically experiences a short-term rebound. Consequently, there is a considerable likelihood that the February series may witness a market recovery, dispelling the prevailing bearish sentiment and initiating an upward trend.

Technically, the Nifty consolidated in a tight range of 21,500-21,800 levels for the first ten trading sessions of January series until January 11. The price broke out of the range on January 12 and made an all-time high of 22,124 on January 16. The price cracked 3.80 percent since then and closed at 21,353 on the last day of January series.

A lower low, lower high price action structure is visible on the daily chart. The price action structure suggests we may be at the start of a short-term correction. The level of 21,285, which is also the immediate previous swing low (made on January 18) is crucial. A strong close below the 21,185 level can take the Index further down towards 20,800 levels.

A bearish Engulfing candle was formed on the weekly chart in previous week with price closing lower again last week (ended January 25), confirms the bearish sentiment.

The interim budget will be announced by the Finance Minister, Nirmala Sitharaman on February 1 and hence, the market is expected to be extremely volatile in the upcoming week.

If the index can hold on to the 21,285 levels, short covering (sellers booking profits) at 21,500 strike can push the Nifty higher. A strong close above 21,750 level can result in resumption of uptrend in Nifty.

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