FIIs creates shorts in March series; Nifty to find support near 10400 in coming week

The Nifty50 recovered from the important support of 10,300. The current pullback is expected to stay for some time considering the cool off in volatility in the Indian and US markets.

The US Volatility index has declined sharply from 40-18% while India VIX has declined from 18-14%. This would give a lot of comfort to equity markets.

In addition, Nifty futures open interest has declined sharply by 25 percent in the last series. Nifty futures outstanding positions have come down to 10-month mean levels now.

This means the index may have limited downsides after the major correction in the last series. The decline in volatility was seen along with the addition of positions at 10300 and 10400 Put strikes. Both strikes have added.

This means volatility writers have become active at this crucial value area of Nifty while the Nifty should trade with a positive bias for some time.

Noticeable, Call base on higher side is placed at 10700 strikes. The current pullback may eventually extend towards these levels

DII flows have supported the index against selling by FIIs. However, the current US$INR pullback would concern the market if it moves beyond 65.5.

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Bank Nifty: Short covering trend can be seen above 25500 levels:

The bank index ended the February F&O expiry on a dismal note. However, it ended the week on a positive note well above 25300 on the back of short covering.

Rollovers were in line with expectations. However, PSU banks witnessed a carry forward of short positions whereas private sector banks have seen closure of these positions

A huge chunk of open interest is seen building in 25500 Call since last week. Despite the index moving above 25300 from 24700. Closure of these positions is missing, which is likely to keep the index move in check near 25500.

However, 25500 remains a key pivotal level above which the short covering trend is likely to extend. On the lower side, sizeable additions is seen in 25000 and 25200 strike Puts indicating major short-term support

IVs have cooled off in recent days and moved towards 14% from levels of 20%. We feel IVs are likely to remain choppy, which will provide support in case of any major sell-off.

In price ratio terms, Bank Nifty/Nifty has taken support near 2.40 levels. We feel the ratio is likely to move towards 2.45 levels on the back of short covering, which can be seen above 25500.

Yield surge continues to keep EM recovery in check:

The surge in yield mainly from US continuous to be the driving force for the risk sentiment globally. As the yield surge picked pace post heavy bond auctions and hawkish fed minutes the risk assets like equity took a breather from its recent recovery trend.

For the recent sell-off, US & MSCI EM has retraces over 50% of losses, while slightly weak recovery seen is seen in European indices and but Indian markets haven’t seen any meaningful recovery as continued negative news flows adversely impacted the recovery.

From a fund, flow standpoint action in most EM’s remained thin. While Taiwan saw an inflow of US $ 80 million, South Korea and India saw outflows of over US $ 350 million (as per provisional data) & US $ 100 million respectively. Indonesia, Thailand, and the Philippines also saw marginal outflows.

In the F&O space, short creation by FIIs was mainly seen in index future space (key addition in Bank Nifty) and OI totalled over the US $ 650 million. In the index option space as well addition was seen on the Call side to hedge portfolio while FIIs sold US$ 350 million

The focal point will continue around the abatement of the yield surge trend. Without this dynamic in place, sustainable recovery is not likely. Caution is warranted as the Dollar is moving higher on the back of increasing cross-currency swaps. Usually, the dollar scarcity scenario is not supportive of FII money inflows.12

Disclaimer: 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.moneycontrol