Nifty's pivot is on weak footings; convincing close above 22,500 must for next leg of rally

Nifty needs to hold 22,500 for further rally

By Ashwin Ramani, derivatives analyst at Samco Securities

The Nifty 50 traded in the 22,300-22,600 sideways range throughout the week ended April 5, making a fresh all-time high of 22,619 on April 4 in the process. Nifty tested the important 22,500 level all the days during the week and faced strong resistance from the Call writers (Bears) around this level. The index ended at 22,514 on Friday April 5, up 187 points on weekly basis. Despite the fresh high in the current week, there are no visible signs of momentum picking pace.

India VIX Falls from 16.74 to 11.34

Falling India VIX is one of the reasons for the steady rise in Nifty. The cooling off volatility has given major comfort to the bulls. India VIX made a high of 16.74 on February 28 and has been in a downtrend trajectory since then, closing at 11.34 on April 5. With the country gearing up for the polls and the start of the Q4 result season, rise in the VIX can’t be ruled out which can give discomfort to the bulls.

FPIs continue to hold more short positions relative to longs

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Ashwin Ramani

Derivatives Analyst|SAMCO Securities

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The foreign portfolio investors (FPIs) activity in Index futures continues to remain subdued. The Long Short ratio moved from 31.34 percent on March 27 to 44.83 percent on the last day of March expiry series. On the back of fresh longs addition and liquidation of existing shorts, the ratio rose further to 46.83 percent on April 2. But this activity was short lived as FPIs resorted to liquidate their long positions in the Index futures resulting into the ratio falling back to 42.67 percent on April 5.

The FPIs have been holding more short positions relative to long positions in Index futures since January 18, 2024. Chances of momentum picking up is unlikely unless there is an active participation by the FPIs in Index futures.

Weak Price Action Structure is a cause of concern

The fall from the high of 22,527 made on March 11 until the low of 21,710 made on March 20 took 8 days while the rise from the same low until the previous high of 22,527 has already taken 10 days with the price yet to close above the previous high of 22,527. The rise is slower than the fall, indicating that the ongoing momentum is not very strong. RSI’ (relative strength index) bearish divergence is also visible both on the daily as well as the weekly chart, with the price making higher highs and the RSI making lower highs.

Short covering fueling the current up move and not fresh longs

The current up move in Nifty is on account of covering of existing shorts rather than building of fresh longs. The open interest in Nifty fell nearly 11 percent from 1.22 crore shares on March 28 to 1.08 crore shares on April 5. During the same period, the price has risen 0.84 percent from 22,327 to 22,514. The open interest has gone down while the price has gone up.

At some point the open interest will start moving up. Either the price will rise along (long buildup) or the price will fall (short buildup). Nifty is at a critical juncture and it will be interesting to see if longs get added here or there is buildup of short positions.

Up move unlikely unless 22,500 level is taken out successfully

The price faced strong resistance around the 22,500 level for all days in the current week. Both the Call & Put writers battled out at the 22,500 strike fiercely with the bears holding on to this level tightly. The Put writers (Bulls) created massive pressure on the bears on April 4 before succumbing to the pressure from the bears on April 5. The option activity at this strike will provide cues about Nifty’s future direction.

The weak price action structure coupled with unconvincing derivative data points indicates one needs to exercise caution. Nifty needs to give a strong close above the 22,500 level for further up move. Nifty is unlikely to sustain above 22,500 level unless Call writers (Bears) exit from this strike.

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