Indian stock market witnessed significant turbulence on 4 June as Foreign Institutional Investors (FIIs) aggressively offloaded positions, leading to a sharp decline in the Nifty and Bank Nifty indices.
The FIIs' long-short ratio for index futures slumped to 12.75 percent as they sold 1.58 lakh index futures, marking a stark reversal from the previous day's optimistic stance. This sell-off, coupled with heightened market volatility, has set a bearish tone for the market post the general election results.
The Nifty index experienced its largest single-day fall since March 2020, dropping below the crucial support zone of 21,700-21,800. This decline represents a 9 percent drop from its swing highs of 23,338.
Nifty’s June 4 intraday low a crucial support level to watch
Arun Mantri, derivatives trader and founder of Mantri Finmart, said that markets are now expected to come under some bear grip for the short term as the option contracts have been stuck badly, keeping the indices in check until the weekly expiries end (5 June for Bank Nifty, and 6 June for Nifty 50). He predicted a typical consolidation phase from the current levels unless yesterday’s low (21,281) is decisively broken in the coming days.
The Nifty reversed from just 1 percent above its 200-day moving average (DMA), which acted as the last line of defence, noted Sudeep Shah, Head of Technical and Derivatives at SBICAP Securities. “Hence we feel that yesterday’s low of 21280 +/-100 points could be an important zone to watch,” he said, adding that this correction suggests potential consolidation with wild swings in the near term.
Market performance and technical overview
In the derivatives market, June futures fell by 6.12 percent with a 1.17 percent rise in open interest, indicating a substantial buildup of short positions. The weekly Open Interest Put-Call Ratio (OIPCR) at 0.51 further signifies mounting bearish bets, with significant call writing at the 22,000 strike and unwinding seen in the 22,000 and 21,500 put options.
For the immediate future, the 21,700-21,650 zone is expected to act as support for the Nifty. A breach below 21,650 could lead to further declines, potentially testing 21,250 and 21,000 levels. Resistance has shifted to the 22,200-22,250 zone, with potential short-covering likely if these levels are breached.
Bank Nifty and sectoral performance
The Bank Nifty index fell nearly 8 percent, marking its steepest single-day decline since March 2020. Unlike the Nifty, Bank Nifty showed less recovery from lower levels, indicating underperformance. June futures for Bank Nifty dropped by 7.81 percent, with open interest surging by 8.65 percent, highlighting significant short buildup. The weekly OIPCR dipped to 0.42, reinforcing a bearish outlook.
The immediate support for Bank Nifty lies in the 46,600-46,500 zone. A move below 46,500 could lead to further declines towards 46,000 and 45,600 levels. Resistance is pegged at the 47,700-47,800 zone.
Volatility and market breadth
Volatility index India VIX surged by nearly 28 percent to settle above 26.5, after hitting 31.7 -- its highest level since February 2022. Sudeep Shah noted that the key support for India VIX is now between 22-23. Maintaining levels above 22 could result in continued high volatility.
Market breadth deteriorated significantly, with the advance/decline ratio favouring decliners. The percentage of Nifty components trading above their 50-day EMA dropped from 60 percent to 23 percent, while for the Nifty 500, it fell from 60 percent to 30 percent, indicating broad-based selling pressure.
Sectoral highlights
Most sectors ended in negative territory, with Nifty PSU Bank, Nifty Oil & Gas, and Nifty Metal indices plummeting over 10 percent, driven by significant short positions. Nifty FMCG showed resilience, recovering after finding support near its 200-day EMA, signalling a shift towards defensive stocks amid high volatility.
Outlook
The market's current bearish sentiment is reinforced by FIIs' aggressive selling and short positions. Arun Mantri noted substantial long unwinding and fresh shorts in index futures, predicting further downside around the weekly expiry. He also observed severe declines in Adani group stocks, PSU banks, and private banks, particularly ICICI Bank and HDFC Bank.
FIIs and Domestic Institutional Investors (DIIs) were net sellers, offloading Rs 12,436 crore and Rs 3,318.98 crore, respectively. With FIIs selling 66,296 call contracts and buying 142,476 put options, a buildup of short positions is evident.
Arun Mantri advised short-term traders to closely monitor the market movement over the next 2-3 trading sessions, until a clear political consensus emerges and election results are fully absorbed.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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