Nifty 50 and Nifty Bank recovered last week, gaining 2 per cent and 0.7 per cent. F&O data showed easing bearish bets as FIIs reduced net short positions by 14 per cent. While sentiment improved, Nifty futures must break above 23,300 to confirm a sustained rally toward the 23,800 level.
Easing bearish bet and key supports strengthen recovery prospects
Nifty 50 (23,053) and Nifty Bank (54,687) recovered last week, gaining 2 per cent and 0.7 per cent, respectively. However, the recovery was relatively stronger in Nifty 50.
The futures and options (F&O) data indicates an improvement in sentiment. Notably, the cumulative futures open interest of both indices declined despite the rally, largely due to the expiry of October contracts.
Foreign Institutional Investors (FIIs) reduced their net short positions in index futures by 14 per cent to 2.41 lakh contracts. Their net short positions in index calls, too, fell 14 per cent to 2.41 lakh contracts. Meanwhile, net long positions in index puts declined 10 per cent to 5.16 lakh contracts.
Retail traders reduced their net long positions in index futures by 13 per cent to 1.87 lakh contracts. Notably, their net long positions in index calls turned into marginal net shorts of 17,861 contracts.
Overall, derivatives positioning suggests easing bearishness. However, the charts show that both indices face important resistance levels. A decisive breakout above these barriers is necessary to confirm a sustained recovery.
Nifty 50
Nifty (Nov) futures (23,099) rallied 1.9 per cent last week. As the contract advanced, its outstanding open interest (OI) increased from 85.5 lakh contracts to 156.6 lakh contracts.
While a rise in price accompanied by an increase in OI generally indicates fresh long build-up, it should be noted that the rollover from October to November contracts took place last week, contributing to the increase in OI.
Nevertheless, the November futures is showing signs of improving bullish sentiment, which is also supported by options positioning.
The Put Call Ratio (PCR) of November monthly options on Nifty 50 increased from 1.10 to 1.24 over the past week as traders sold relatively more puts compared to calls. Participants generally write puts when they are bullish on the underlying index.
Therefore, the F&O data suggests a positive shift in sentiment.
However, the chart shows that a key hurdle lies ahead at 23,300. Although the price action since early October indicates a gradual shift in control from the bears to the bulls, Nifty (Nov) futures needs to break above 23,300 to confirm a trend reversal.
If the contract surpasses 23,300, it can extend the rally to 23,800. Notably, the region between 23,800 and 24,000 is a resistance band. The subsequent hurdle is at 24,500.
Alternatively, if November futures decline from the current level, it can find support at 22,550 and 22,350. As long as the latter holds, the bulls will retain an advantage.
However, a breakdown below 22,350 can significantly increase the likelihood of another leg of decline, potentially dragging the contract to 22,000 and subsequently to 21,800.
Overall, the derivatives data and the chart of Nifty futures indicate that the bears are losing their grip. The probability of a breakout above 23,300 appears to be increasing.
Nifty Bank
Nifty Bank (Nov) futures (54,823) gained 0.5 per cent last week. The outstanding open interest (OI) of this contract increased from 12.5 lakh contracts to 22.35 lakh contracts during this period, suggesting fresh long build-up.
However, as in the case of Nifty futures, the rise in OI was also influenced by the rollover of positions from October to November contracts.
Supporting the positive bias, the Put Call Ratio (PCR) of November options increased from 0.87 to 0.95. Although the increase was marginal, it indicates relatively higher put writing compared to calls, a positive sign.
Thus, the overall derivatives data of Nifty Bank points to improving sentiment.
However, the chart calls for greater caution. By the middle of last week, Nifty Bank (Nov) futures had slipped to a lower low of 53,960 compared with the previous month's low of 54,466.
Although the contract recovered from this low, it needs to decisively break above the resistance levels at 55,750 and 56,500 to confirm a bullish trend reversal. A breakout above 56,500 can trigger a rally to 58,000 and subsequently to 58,800.
Alternatively, if Nifty Bank (Nov) futures breaks below the support at 54,000, the bears can regain strength, potentially dragging the contract to 53,000.
Overall, Nifty Bank futures appears relatively weaker than Nifty futures. Nevertheless, the possibility of a recovery remains intact as long as the support at 54,000 holds.