'Nifty likely to see retracement after sharp gains; banks to witness profit-booking'

Navneet Daga

Indian market made up handsomely for its recent underperformance to global peers as Nifty rallied by 15 percent from the previous week low and 35 percent from the March month’s low of 7,511. However, it retraced more than 50 percent of the previous entire decline which occurred from its record high.

Nifty’s price action at current levels needs to be closely monitored as levels of 10,000 could act as pivot point from a near-term perspective. Sustenance above 10,000 which is a physiological level, near previous swing high above 9,900 mark, and larger call concentration seen on 10,000 strike on monthly series is essential to gain further momentum on the upside, while inability to do so (i.e. sustenance below 10,000) could drag it lower to revisit levels of 9,700.

Nifty’s coming weekly expiry shows maximum open interest concentration at 10,500 call and 9,500 put strikes. Scattered buildup across the strikes indicates traders in near term expecting both sides swings given volatile price swings seen on high beta space.

In the May series, Nifty lost 3.75 percent; while Bank Nifty lost 11 percent. However, the recent outperformance shows a catch up move to continue for banking stocks. Bank Nifty rallied 26 percent from the recent low, however for the current year it is still down by ~37 percent against Nifty’s 18 percent decline.

Bouts of short covering on banking and financial stocks caught traders fancy as aggressive call unwinding along with put writing seen during the week.

In the previous session, Bank Nifty reclaimed levels of 21,000, however failed to surpass April month’s peak, thereby displaying negative divergence with respect to Nifty.

We expect Bank Nifty to face significant hurdle between 21,500 and 22,000, and is likely to remain volatile in short term.

India VIX hovered near levels of 30, it continues to remain beneath its short-term and medium-term averages. On sectoral front, long additions are visible in Media and Oil & Gas space, while fresh shorts are seen in Banking and Financials.

FIIs' derivatives stance remained bullish from the start of June series as Index futures long to short positions remained in favor of bulls with ratio moved to 1.68x levels, significant long additions on stock futures seen in past couple of days.

We expect markets to retrace in near term but downside is likely to be limited for Nifty, while options writers likely to remain sideways as delta moves along with possibility of vega rise is higher in near term.

Gold prices are likely to remain within a range, while silver prices could outperform from near term perspective. USD-INR continues its range bound action with overhead resistance near 76.50. US key indices future continues to trend higher.

The author is Senior Derivatives Analyst – Institutional Equities at YES Securities