Short covering fuels Nifty’s rebound, FPIs turn bullish: Is April poised for a rally?

Nifty Trend

March series wrap-up: Bulls take charge

The Nifty index concluded the March series on a strong note, rallying 4.64%, reinforcing bullish market momentum. However, Nifty futures rollovers saw a sharp decline to 76.09%, down from March 83.57%, and remained below the three- and six-month averages of 80.33% and 78.72%. The lower rollover percentage suggests traders are hesitant to carry forward positions, hinting at the exhaustion of the prevailing downtrend and the possibility of a fresh bullish leg, albeit with caution amid upcoming market triggers.

April series kick-off: A shift in market dynamics

As the new series begins, Nifty carries forward an open interest of 14.07 crore shares, a notable drop from March’s 17.64 crore shares. This contraction in open interest, coupled with an index rally, signals short unwinding. Bears appear to be squaring off their positions, suggesting that short-covering momentum is fuelling optimism for a potential continuation of the bullish to sideways movement, albeit with heightened volatility ahead.

Volatility remains muted, but for how long?

India VIX, the market’s "fear gauge," remained largely stable throughout March, starting at 13.40 and cooling slightly to 13.30 by series-end. With VIX hovering below the critical 15-mark, market uncertainty remains low. However, key macro events such as India-US tariff policy developments, the RBI MPC meet (where a 25 bps rate cut is anticipated), and inflation data could reignite volatility in the coming sessions.

FPIs drive market optimism

Foreign portfolio investors (FPIs) played a crucial role in March’s bullish sentiment, aggressively unwinding their short positions. Their Long-Short ratio, which started at 15.19%, remained subdued till mid-March but saw a sharp jump to 39.86% by the series’ end as FPIs covered their shorts and added fresh longs. This shift was driven by an oversold market structure, profit booking, and a build-up of short positions. If FPIs continue to be active buyers, the bullish momentum could persist.

Options market pinpoints key levels

The derivatives landscape highlights critical levels. On the upside, the 24,500-strike Call option holds significant open interest, followed by the 24,000 level, making these key resistance zones. On the downside, the 23,500 Put strike commands the highest open interest, with 23,000 acting as the next major support. A breakout above the 23,800-24,000 zone could fuel short-covering, allowing bulls to take charge and potentially push the index towards 24,500-24,800 levels.

March outlook – is trend reversal in play?

The Nifty index snapped a five-month losing streak with a strong recovery from its March lows, underscoring the bulls’ resilience. This rebound, supported by a close above the 20-month EMA—a historically strong support zone—signals a structurally bullish outlook. With a decline in open interest, reduced rollovers, and increased FPI activity, the prior downtrend appears to have lost steam, increasing the probability of sustained upside momentum in the upcoming series.

From a technical standpoint, the index has formed a robust base near its previous resistance, now turned support, in the 23,000-22,700 zone. This area coincides with key short-term moving averages and significant Put writing, reinforcing its strength. On the upside, resistance is firmly placed at 24,000, and a decisive breakout above this level could trigger an aggressive short-covering rally. Additionally, major sectoral indices are displaying reversal breakouts, hinting at further upside potential.

Trading strategy: Buy on dips, watch out for 24,000 resistance

As long as Nifty sustains above the critical 23,000 support, bulls are expected to remain in control. A decisive move above 24,000 could trigger renewed buying pressure, potentially propelling the index towards 24,800. Traders should adopt a “buy on dips” strategy as long as the index remains above the 23,000-22,700-support zone. A breakout above immediate resistance levels will be the key catalyst for the next bullish leg.

With April set to be a pivotal month, market participants must closely monitor these crucial levels to anticipate the next big move in the unfolding market narrative.