If FIIs continue with their selling spree, Nifty likely to find support near 10,300-10,400

By Amit Gupta

ICICIdirect

After a good 8 percent correction seen from the highs, the Nifty50 has started showing resilience near 10300-10400 levels. With the decline in volatility near these levels, it seems that the index may try to form a short-term base near these levels and may consolidate for some more time.

In this consolidation, the Call positions are active at 10700 strikes and the Nifty should try to give a pullback towards these levels.

The Nifty50 is primarily getting pressure from banking stocks while the technology, pharma and infrastructure space may see some pullback. If the sales numbers of Auto companies are good, which they have been so far, auto stocks can also start supporting the index.

The US market volatility has declined sharply from 40% to 18% indicating that their market may also consolidate now which can halt the fall seen in the emerging markets (EMs).

However, the focus on the US bond yield would remain high and if it starts moving higher in quick time, it would be a major factor behind further market weakness across the globe including India.

The March 21st Federal Reserve meet would give a strong indication of the expectations of the number of rates hikes in the year 2018.

The foreign institutional investors (FII) outflows on a daily average led to Rs-1000 cr. are continued which is keeping the markets subdued.

Due to this, the rupee has also started depreciating. However, the record high Forex reserves in India of $422 bn may not let the rupee to depreciate sharply.

Bank Nifty: Can slip towards 24500 if does not recover above 25200:

There was no respite for PSU banks where the selling intensified as the follow-up negative news continued to hit Dalal Street. The BankNifty index which made a high of approx. 25800 levels finally settled well below the support levels of 25000 losing nearly 1000 points from the high.

Below 25200 levels, selling was also seen in private sector players and on the weekly expiry day, most of the private sector leaders closed below the support levels.

The IV’s which was hovering near 18 percent have slipped significantly in the past few days. However, after taking support near 13 percent, it witnessed some bounce on the back of buying seen in the Put options.

Call writers which were active in 25500 strikes have shifted their trade to 25200 and 25000 strikes whereas, on the Put side, additions were seen in 24500 strikes.

We feel, the index is likely to remain under pressure below 25200 levels and the follow-up selling is likely to push the index towards 24500 levels.

In current price ratio of Bank Nifty/Nifty has slipped below the support levels of 2.42. The stocks like Axis and HDFC Bank have already moved below the support levels, and the aggressive short additions in PSU banks will keep the index move in check which in turn push the ratio towards 2.35 levels on the back of underperformance in banking stocks vis-a-vis Nifty.

Yield surge continues to keep EM recovery in check:

The US yield continued its upwards trajectory for the week gone by. The US Fed chair Jerome Powell’s first congressional testimony added fuel to speculation over faster rate hikes in the US in 2018.

Fed chair’s hawkish assessment over US economic growth as well inflation outlook over market volatility raised expectations of as much as 4-interest rate hikes in 2018 as against major current expectations of three-rate hikes

From a fund, flow standpoint action in most EM’s remained thin. While Taiwan saw an inflow of US $ 86 million, Indonesia and India saw outflows of over US $87 million (as per provisional data) & $300 million respectively.

Thailand and Philippines also saw reasonable outflows. The FIIs have been continuously selling in the month of February after remaining net buyer of equities to the tune of Rs12000 crore in the month of January. They have sold equity to the extent of Rs. 17000 cr. so far.

In addition due to limit hit in Debt segment, their flows in Debt market have remained quite muted. This has kept Rupee under pressure off late.

In the equity markets, MFs support has continued. MFs have bought close to Rs13260 crore. This has supported the stocks from further decline.

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.