Moneycontrol
Jan 13, 2018 11:52 AM IST | Source: Moneycontrol.com

More short covering could take Nifty above 11000 by January expiry

Bank Nifty has faced resistance at 25800 since the middle of December. However, we believe the index could eventually start moving higher on the back of short covering expected near expiry.


By Amit Gupta

ICICIdirect

After remaining near 10,500 marks for the last couple of weeks, the Nifty started sustaining above 10,600 since the start of last week and ended at the week at the highest level.

The Nifty had started the January series with one of the highest open interests (OI) seen in the last year. This open interest contains the short Nifty future positions that are either formed speculatively or as hedged positions against long portfolios before the upcoming event of Union Budget 2018.

Nifty Futures premium has declined to 3 points from the last series premium of 50 points with an increase in open interest, which suggests short positions are still averaged near 10600.

Hence, sustainability of this level could lead to further short covering as we approach towards January expiry.

The highest Call base is still placed near 11000, which should be the eventual target for the Nifty. The Nifty Put strikes are seeing significant additions along with a decline in volatility, which suggests the index is forming a base at higher levels of 10500-10600.

The Nifty January 10500 and 10600 Put strikes have added close to 2.2 million shares each last week. The non-banking Nifty heavyweights have so far supported the index. This trend may continue in the coming week as well.

However, near expiry, banking stocks, particularly midcap banking stocks, should start witnessing short closure after remaining sideways for many months now.

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Bank Nifty: Index well placed to move towards sizeable Call base of 26000

Bank Nifty has faced resistance at 25800 since the middle of December. However, we believe the index could eventually start moving higher on the back of short covering expected near expiry.

Volatility continued to decline, providing more confidence to options writers. Call open interest has shifted to the higher strike of 26,000 whereas open interest concentration remained high in 25,500 Put.

In the past two weekly expiry, additions continued in 25500 Put indicating major short-term support. However, in case of any major sell-off, selling is likely to get arrested near 25300.

The current price ratio (Bank Nifty/Nifty) has been continuously declining from 2.50 to 2.42 levels in the past few weeks. However, the ratio has a decent support near 2.42 levels.

We feel outperformance in banking stocks can be seen near expiry, which will take the ratio towards 2.46 levels.

Year 2018 continues to see strong risk-on sentiment for equities:

Asian stocks continued their ascent supported by US earnings optimism and a rise in oil prices while the euro edged higher as the European Central Bank signalled an end to its massive stimulus.

The risk-on sentiment in equity remained strong as Wall Street's three major stock indices hit record highs with earnings for S&P 500 companies expected to have increased by 11.8 percent in the recently-ended quarter.

MSCI world index also hit a record high in the last session after having risen in seven of the eight business days so far this year for a total increase of 3.3 percent. This momentum was seen despite the rise in bond yields, dollar and oil as growth narrative pick up pace.

From a fund flow standpoint, cash flows of FIIs in Indian equity segment totalled over US$140 million. Other EMs also saw inflows, led by South Korea with inflows of over US$330 million, Malaysia US$147 million and Indonesia of US$88 million. Taiwan, however, saw outflows of US$30 million

In the F&O space, FIIs toned their bearish bets. FIIs covered shorts to the tune of $ 333 million in index futures while stock futures saw fresh longs of US$139 million

Growth and strong quarterly across major parts of the globe was the key narrative, which kept the equity exuberance intact.

Yield differentials among global and Emerging Markets would remain key in 2018 as tightening global yields on the back of major central bank’s hawkish stance could see outflows pressure on EMs. Inflation & growth in developed economies in 2018 will be key catalysts as we tread through 2018.

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Disclaimer: The author is Head of Derivative from ICICIdirect. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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