Short covering aided rally in Nifty likely to continue during next week

The volatility index rose for all four days in the current week. The India VIX rose from 11.53 on April 12 to 13.46 on April 19, and gave discomfort to the bulls. However, the volatility cooled off marginally on Friday giving some respite to the bulls. With a strong bullish reversal candle formation on the weekly chart, any fall in the VIX can give comfort to the bulls in the coming week as we approach the last week of the April series.

FPIs go on a rampant selling spree

The FPIs liquidated long positions in Index futures and aggressively built short positions as the long-short ratio slumped by 59 percent in a last trading week to 33 percent on April 19 from 56 percent on April 12. However, the FPIs built some long positions on Friday because of which the ratio moved up marginally from 33 percent to 35 percent. They still hold more short positions relative to long positions in Index futures. With the ratio languishing at the bottom, short covering by the FPIs can’t be ruled out in the coming week which can lead to a jump in the price.

Nifty bounces off Key Support on the Daily Chart

The level of 21,800 acted as a strong support for Nifty in Friday’s trading session. We can also see how Nifty bounced off from the 50 DEMA levels the previous two times on 24th January and 20th March 2024 respectively. Nifty is likely to take trendline support and move up higher in the week ahead.

The candle formation resembles a Piercing Line pattern (where a green body covers at least 50 percent of the previous red body) which is considered to be a bullish reversal signal. A strong close above the Friday’s high of 22,180 can ignite fresh buying interest in Nifty again.

Put-Call ratio (PCR) recovers marginally

The Put-Call ratio (PCR), a sentiment indicator, fell below 1 (One) last week. The PCR went further down from 0.93 on April 12 until 0.81 on April 18 as the Call writers (Bears) dominated the Put writers (Bulls). The bulls sprung back in action on Friday as the PCR improved marginally to 0.96. If the Put writers (Bulls) can keep up the momentum, Index is likely to move higher in the coming week.

Nifty’s 22,000 level will act as a make-or-break for the Index

The maximum Put open interest in Nifty for the upcoming April 25 expiry is placed at the 22,000 strike. Despite the massive selling pressure in the previous week, the Put writers (Bulls) managed to held on this level. Significant additions were observed at the 22,000 strike, thereby making it a key support for the index.

More Put writing (Bulls’ entry) coupled with Call writers (Bears) exiting with a positive price action setup can give a much-needed boost to the price in the coming week. Nifty is likely to fall below 22,000 only if Put writers (Bulls) exit from this strike.

Both the price action and the derivative data indicators point towards a possible short covering in the last week of the April series.

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