Nifty set for more correction as geopolitical tensions, weak technicals weigh; here’s what market setup shows

Nifty, Bank Nifty Trade Setup

Indian stock markets are likely to see further downside in the near term as a combination of rising global geopolitical tensions and technical weakness in domestic markets spooks investors. The Nifty has already dropped 480 points in the last five trading sessions, retreating from its all-time high of 26,277 to end at 25,797 on October 1

Analysts expect further pressure on headline indices, with Nifty set to test 25,550-25,600 on the downside as geopolitical tensions in the Middle East, particularly the escalating conflict between Iran and Israel, continue to fuel uncertainty.

FII-driven market upmove coming to a halt; retail, HNIs cautious

Ruchit Jain, Lead Research Analyst at 5paisa.com, said that the market could be in for a corrective phase. It’s only the foreign institutional investors (FIIs) that have driven the recent upmove post the U.S. Federal Reserve's rate cut. However, Jain pointed out that domestic retail investors and high-net-worth individuals (HNIs) have largely stayed away, contributing to the market's lack of breadth.

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"In index futures, the client-side long-short ratio is at 35 percent, with no new interest to add longs. On the other hand, FIIs have an 80 percent long ratio, leaving little room for new long build-up. This caps the upside for Nifty," said Jain.

Large cap stocks may not support Nifty, Bank Nifty; short build up seen

Rajesh Palviya, Senior Vice President at Axis Securities, sounded a cautious note, pointing to the technical weakness in Nifty and key sectors like banking and finance. Banking stocks remain vulnerable, with no major large-cap counters available to support the index in the short term.

"There has been a short build-up in Nifty on the weekly expiry, and the technical structure has already weakened,” he said. Nifty could see an immediate fall of 100-150 points in tomorrow's trading, adding to the recent correction. This could shake up a lot of weak hands in the market, he added.

Nifty, Bank Nifty setup: Immediate downside; here’s how much indices may fall

Nifty closed with a marginal decline of 0.05 percent on October 1 (down 21 points) and Open Interest (OI) unwinding of 2.09 percent (a decrease of 338,225 contracts). This suggests a long unwinding trend. Since the start of the expiry, Nifty has dropped 1.6 percent in price, with a total OI unwinding of 7.8 percent, further confirming the unwinding of long positions, said Rajesh Palviya.

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The next support for the Nifty is at 25,550-25,600. We could see an immediate negative impact on the headline indices," Palviya said. Ruchit Jain also said that the Nifty index may find immediate support at 25,550–25,600 levels intraday in tomorrow’s trading, and that the broader trend remains downward. If the immediate support is taken out, then the Nifty could further fall to 25,350 in a few days, he added.

As for Bank Nifty, the index closed at 52,923, registering a 0.10 percent drop (down 54 points) along with an OI addition of 7.9 percent (an increase of 163,155 contracts), indicating a short build-up. Since the beginning of the expiry, Bank Nifty has seen a 2.7 percent price drop and a 3.9 percent increase in OI, reinforcing the short build-up pattern, said Rajesh Palviya.

Long term investors may 'buy on dips'

Despite the negative short-term outlook, Palviya advised long-term investors to use the current market decline as a buying opportunity, citing the overall bullish long-term structure. He noted that certain sectors like sugar and chemicals have seen long build-ups and could continue to offer upside potential, while banking, finance, cement, and automobile stocks may face profit booking in the immediate future.

Domestic markets looking at immediate downside amid global nervousness

Furthermore, global markets have already reacted negatively, with the U.S. S&P 500 falling by 0.9 percent and the Wall Street volatility index (VIX) spiking higher, indicating more market swings ahead. With the Nifty facing both global and domestic headwinds, experts are urging caution. "We are predominantly looking at a downmove rather than an upmove," Jain said. It will also be important to watch how the U.S. markets perform later tonight, he added.

Also read | Middle East conflict will have no significant effect on the economy in short term; could spell trouble if war is prolonged: Economists

In the short term, geopolitical developments in the Middle East and global oil prices will be crucial factors for the direction of Indian markets, with Nifty likely to remain under pressure unless new positive triggers emerge.

SEBI's F&O rules, geopolitical tensions throw fresh challenge for markets

Crude oil prices have surged following Iran’s ballistic missile attack on Israel, hitting $74 per barrel, with fears of further escalation in the Middle East. Analysts caution that if the Brent crude price breaches the $85 mark, markets could correct by as much as 15 percent. Despite this, some experts believe the rally in oil prices could eventually subside if the conflict remains contained within the region.

Adding to the domestic market challenges, new SEBI regulations for futures and options (F&O) trading and concerns over modest growth in the upcoming earnings season are expected to weigh on sentiment.

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