Volatility eases, but uncertainty looms: Nifty’s March series at a crucial crossroad

Nifty Trend for March

As we enter the March series in the Futures & Options (F&O) segment, investors are puzzled as to how it will unfold going ahead. The recent sell-off in the markets and consecutive five monthly losses in the benchmark indices have made the situation more intriguing as everyone is busy asking the same question; where is it going to end?

Historical Insights

When the Nifty 50 index experiences five consecutive months of decline, it often indicates a turbulent phase going ahead for the Indian stock market, marked by significant investor wealth erosion and heightened market volatility.

Notable Historical Instances

September 1994 to April 1995: Nifty endured its longest losing streak of eight consecutive months, plummeting by over 31%.

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Dhupesh Dhameja

Derivatives Analyst|Samco Securities

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July 1996 to November 1996: The index recorded a five-month decline, wiping out approximately 26% of its value.

Historically, a five-month market slump often precedes a volatile phase as we have witnessed now. Nifty and Nifty Bank have tanked 16% and 11.20% respectively from their September 2024 highs. It also suggests that post consistent sell-offs, the recovery also take longer time, between two to four quarters.

March Series Kick-off

As the new series unfolds, the Nifty carries forward an open interest of 1.76 crore shares, a drop from the February series starting at 1.81 crore shares. This contraction in open interest, paired with a decline in the index, suggests a wavering conviction among market participants. Bears appear to be lightening their short positions, hinting at concerns over a potential rebound and heightened volatility ahead.

February Series Recap

Nifty wrapped up the February series with a notable decline of 3.23%, underscoring a bearish market sentiment. Nifty futures rollovers exhibited a cautious optimism, climbing significantly to 83.57% from the previous month's 80.77%. This remains above the three- and six-month averages of 80.95% and 79.16%, respectively. The uptick in rollovers indicates traders are extending positions, expecting the prevailing downtrend to persist, albeit with vigilance toward upcoming market fluctuations.

Volatility Eases, But for How Long?

India VIX, the market’s "fear gauge," signaled reduced turbulence in February. Beginning at 17.39, it cooled down to 13.30 by the series’ close, reflecting diminished panic. With the VIX staying below the crucial 15 mark, the market is experiencing a phase of lower uncertainty. However, as the financial year draws to an end, portfolio rebalancing by institutional players could stir up volatility once again.

FPIs Maintain a Bearish Stance

Foreign portfolio investors (FPIs) played a pivotal role in shaping February’s downbeat tone. Their Long-Short ratio started at 11.88%, slipped to 10.48% early in the month, and remained subdued at 16.25% by the close. These reserved positions were driven by geopolitical concerns, a depreciating rupee, and disappointing Q3 earnings. As long as FPIs remain on the sidelines, their lack of aggressive buying could prolong the cautious sentiment gripping the market.

Options Market Highlights Crucial Levels

The derivatives space offers a clear snapshot of key battlegrounds. On the upside, the 23,000-strike Call option holds the highest open interest, followed by the 22,700 level, making them critical resistance points. Conversely, the 22,000 strike Put option commands the largest open interest on the downside, with 21,500 following closely. As the index approaches 22,000, this level remains the last stronghold for bulls attempting to defend the market.

March Outlook – Limited Recovery Hopes Amid Weak Structure

As Nifty steps into the financial year’s final month, historical data suggests that out of 20 such instances, 13 have been positive for the index. However, given the current setup, prospects for a recovery appear bleak. The index has failed to close above its previous month’s high for five straight expiries, indicating a structurally weak technical outlook. A combination of declining open interest, elevated rollovers, and sluggish FPI activity implies that while the downtrend might be losing momentum, volatility is likely to remain a dominant theme on both sides.

From a technical perspective, the index’s last hope for a minor pullback lies around the 22,000 level, where significant Put writing suggests a strong support zone. Meanwhile, resistance is firmly placed in the 22,500-22,600 range, coinciding with a cluster of short-term moving averages and technical barriers. With major oscillators lingering in oversold territory, a temporary bounce-back cannot be ruled out.

Trading Strategy

For now, as long as Nifty remains below the critical 23,000 resistance, sellers are expected to stay in control. A decisive breach below 22,000 could intensify selling pressure, potentially dragging the index toward 21,500. Traders are advised to adopt a "sell on rise" approach as long as the index stays beneath the 22,700-23,000-resistance zone. A revival in bullish sentiment will only be confirmed if the Nifty breaks decisively above these resistance levels.

March is set to be a defining period, so market participants must monitor these pivotal levels closely to decipher the next directional move in this unfolding market narrative.

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