Dhupesh Dhameja, Samco Securities
Nifty Trend: Last week, the Nifty index recorded its biggest weekly fall of 4.77 percent. Due to this, all the momentum gained in the last four weeks evaporated. With Nifty closing below 200-DEMA and maintaining the lower-high pattern, there are concerns of continuation of the decline in the coming week. This concern has increased due to ongoing geopolitical tensions.
This big decline in the last week has created a bearish engulfing candlestick pattern on the weekly chart. On the daily chart, Nifty decisively broke below its crucial 200-day exponential moving average (200-DEMA) and made a series of lower highs. This sharp decline marks a strong return of bearish momentum, as buyers expecting further upside were trapped.
The overall market structure appears to be disturbed. Decreased buying interest is further increasing the possibility of recession. With the recent fall, Nifty breached the psychological support level of 24,000. This is a sign of a big change in market sentiment. The level of 24,800 has now turned into a major stiff resistance. Nifty is currently hovering around its immediate support range of 23,500-23,200, which is getting support from the 50-week exponential moving average (50-WEMA). This is a level that has historically served as strong support.
On the daily chart, the index has consistently failed to close above its previous high. This reflects continued selling pressure at upper levels. Moreover, Nifty is trading below the important psychological resistance band of 23,800 to 24,000 which is supported by heavy call writing. This cautious sentiment suggests that traders are skeptical about the possibility of any immediate upside. Closing below 200-DEMA, as well as RSI (Relative Strength Index) falling below 40 are signs of bears strengthening their grip on the market.
Open Interest (OI) Trend
This week a strong rise was seen in Nifty Futures OI. It increased from 12.60 million shares to 14.62 million shares. It gained 2.02 million shares. This sharp increase in OI, coupled with the 4.77 per cent decline, indicates aggressive short positions by bears, indicating continuation of negative sentiment in the market.
FPI Long-Short Ratio
Foreign portfolio investors (FPIs) have drastically cut their long positions, with the long-short ratio falling to 31.20 per cent from 38.69 per cent at the beginning of the week. This decline is indicative of a decline in expectations of institutional investors, which further strengthens the bearish outlook.
Daily Voice: There will be sharp fluctuations in the market, companies with good quality and strong balance sheet will sail through.
Important Weekly Series Levels
Weekly options data shows that the 24,000 strike has the highest call open interest, while the 23,000 strike has the highest put open interest. Heavy action in 23,600-24,000 call range and 23,500-23,000 put range indicates immediate resistance at 24,000 and important support at 23,000. Heavy call writing in 23,600-24,000 range strengthens the existing bearish sentiment. The Put-Call Ratio (PCR) has fallen to 0.71, indicating that bears have a strong hold on the market. The surge in open interest, coupled with the index’s sharp decline, is pointing to stranded buyers. Also, it seems to be opening the way for a possible decline towards the next support level of 23,200.
Forecast for the coming week
The sharp fall from the 24,000 level has firmly established this level as a major resistance zone. Immediate support for Nifty lies between 23,300 and 23,500, supported by strong put writing and previous swing lows. Maintaining this range will be essential for any meaningful recovery. Option series and price action indicate that on the upside, there is important resistance in the 23,800-24,000 zone. Sustainment above 24,000 may increase hopes of a short-covering rally and Nifty may move towards 24,500.
Reduction in long positions of FPIs and increase in open interest during a sharp fall in the index confirms the bearish sentiment. If the index slips below 23,500, selling could increase as buyers would trim their positions, leading to the index falling to the crucial support level of 23,000. As long as Nifty remains below 23,800-24,000 zone, the “sell on bounce” strategy is expected to continue, paving the way for continuation of the bearish trend.
Dhupesh Dhameja is a derivatives analyst at SAMCO Securities.
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