Short bets in index futures ease but still heavy. Where are Nifty, Bank Nifty headed?

Both the Nifty and Bank Nifty remain in a broad, but well-defined trading range

Short bets in benchmark Nifty futures have eased in November, showing positive signs, but are still heavy enough to keep market participants cautious, derivatives analysts have said.

The Nifty started November on an optimistic note, erasing nearly half of the losses of the previous month. The turnaround is due to the successful unwinding of short positions carried over from the October series, combined with a fall in volatility, analysts said.

However, "going by the current data, the market sentiment stays cautious”, said Milan Vaishnav, CMT, MSTA, founder of Gemstone Equity Research & Advisory Services.

Where is Nifty headed? 

With the volatility index (VIX) cooling near 11 percent and the Nifty regaining the vital 19,200 mark, the tide favours the bulls, said Akshay P Bhagwat SVP, Derivatives Research, JM Financial Services. The index is aiming for the psychological 20k mark.

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According to Vaishnav, both the Nifty and the Bank Nifty remain in a broad but well-defined trading range. The Nifty has strong resistance between 19,460 and 19,550.

"It has support at a full throwback zone of 18,900-19,000. So, we will not see any trending and sustainable up moves on either side. A strong directional bias will emerge only above 19,550 or below 18,900," he said.

Where is Bank Nifty headed?

The same goes for Bank Nifty, which is relatively weaker than Nifty, said Vaishav. The banking index has a strong resistance in the 44,000-44,200 zone and a support at 43,100.

"So, this index too remains trapped in this defined 1,000-point trading zone. A trending environment shall emerge only if the upper edge is taken out or the lower support gets violated," he added.

Nifty futures data shows short-covering, further steam 

According to Vaishnav, the recent technical pullbacks in the Nifty have come on net decline on three-month cumulative data, which shows strong short-covering from lower levels. A fall in VIX along with open interest additions piling up at the 19,000 strike in puts is evidence of put writing positions building a strong support base.

Call writers’ writing far off out of the money (OTM) 20,000 strike suggests further steam in the index, Bhagwat told Moneycontrol.

"In the client segment activity, stock-specific action in futures draws a long-short ratio of around 89 percent, while index futures note this ratio at 64 percent, which is suggestive of long bets being positioned for the Nov series indicative of a positive outlook for the broader market breadth," he added.

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Derivatives positions to lighten in the run-up to elections  

Over the next three months, in addition to the current global concerns, as India braces for national elections in 2024, positioning in the derivatives space is expected to go light gradually. "Price volatility may be a key ingredient," he added.

The foreign institutional investor (FII) long-short ratio in index futures neared its all-time low of 11 percent at the start of the November series, Bhagwat said. However, the latest reading has seen the ratio improve to 20 percent as the market has seen a healthy recovery from the October lows.

The domestic institutional investor (DII) long-short ratio seen at 50 percent at the start of the month improved to 56 percent on additions of long exposure in the last few sessions.

Largecaps to outperform

"Another major shift I am seeing is the strongly improving relative strength of frontline indices against the broader Nifty 500 index. This would mean that going ahead from here, we might see large-caps relatively outperforming the small and midcaps," Vaishnav said.

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Will short covering be replaced by fresh buying?

"Net data open interest positioning in index futures is suggestive that short bets are still heavy in the system. However, a short squeeze if it continues, promises further upsides for the indices for a revisit and break of all-time highs in the coming months," Bhagwat said.

"Until now, we have been seeing short-covering led technical rebounds," said Vaishnav, adding it would be crucial to see if this short-covering is replaced by fresh buying.

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