The cash buying support in the broader market leads to short covering in Nifty futures, which was primarily seen in Friday's session.
By Amit Gupta
The Nifty50 is expected to consolidate with a positive bias above 9850-9900. The decline in volatility along with an increase in open interest at Put strikes suggests writing in Put options, which has led to positive consolidation.
So far the Nifty was mainly dragged by Nifty Bank due to short positions formed in the index. However, the support is expected to come from non-banking heavyweights. The coming up earnings season would also lead to a more stock specific scenario.
India VIX has declined from 14 percent to 11.5 percent in the recent Nifty pullback. Buying from mutual funds has supported the markets. They have bought more than Rs 10,000 crore in the last few sessions
The rupee has appreciated after hitting Rs 65.80/USD levels. This has happened on account of buying in the debt segment from FIIs. This has nullified the equity selling from them.
One major factor in Nifty Futures is the lower premium with respect to spot. This is termed as the basis, which was seen as low as 8 points also.
This means shorts were formed in the Nifty. The cash buying support in the broader market leads to short covering in Nifty futures, which was primarily seen in Friday's session.
Nifty Bank: 24000 remains crucial support
Post the RBI monetary policy outcome in which key interest rates were kept unchanged, the index witnessed a round of profit booking. As the index slipped, aggressive writing was seen in 24,200 strike Calls, which kept the index move in check on the weekly expiry day
However, rollover of this writing positions was not seen for the ongoing weekly expiry. Open interest additions were seen in 24,000 strikes Put followed by 23,800 strikes. IVs, on the other hand, also remained choppy, which provided more comfort to option writers
As the open interest base was relatively high for the October series, OI closure of nearly 7% is already seen. We feel the short covering trend is likely to continue as the index is sustaining well above 24000 in the past few days. This trend is likely to extend up to the sizeable Call base, which is been placed near 24500
The current price (Nifty Bank/Nifty) ratio has fallen significantly from the levels of 2.49 on the back of short additions in banking stocks. As the short covering is been taking place and the positional support of the ratio is near 2.41 levels, we feel Nifty Bank is likely to see more upside from current levels
FIIs selling in Indian equities continues in October
FII outflows continued in the Indian equity segment. However, the pace of selloff slowed marginally to US$385 million. However, the EM fund outflow picture changed marginally for markets such as Brazil that saw an inflow of almost US$200 million.
Fund flow in many Asian markets was tepid as they were closed for holidays. South Korea, however, saw an outflow of over US$480 million. While FIIs broadly remain cautious on EMs, the MSCI EM has inched higher again to its three year high (up over 2%) and currently above 1100.
This suggests the risk-on sentiment still remain strong for EM complex despite FII selling. Look at the FIIs action in F&O segment, that positioning continues to remain weak.
In index futures segment, there was the addition of US$150 million. In the index options segment, there was buying over US$430 million (hedging). In the stock future segment, there was addition of US$570 million
The sharp depreciation trend in rupee has seemed to ebb and with the RBI maintaining status quo on rates with a balanced outlook for the future.
The rupee has reversed its depreciation momentum and is likely to remain in consolidation in the range of 64.5-65.7. A move beyond 65.7 could again trigger some sell-off in the debt segment (may be a key trigger for the weakness in equity segment as well).
However, a close tab should be kept on GoI 10 year yield, which is shooting towards 6.8%. A move beyond this level could trigger weakness in the rupee while equity and FII may sell equity and debt.
With the US Fed starting its balance sheet unwinding in the coming week, the reaction from the market will be the key. Additionally, progress on tax reform coupled with data like change in nonfarm payrolls, etc., will determine the direction not only for US markets but also for global marketsDisclaimer: 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.