Can Nifty scale new highs next week despite bears having an upper hand?

By Ashwin Ramani, derivatives analyst at SAMCO Securities

Even as the Nifty posted weekly gains of 258 points to close at 22,041 on February 16, the week ahead is expected to be volatile and choppy. The reason being that significant players in the future & options (F&O) market, namely foreign portfolio investors (FPIs), are remaining hesitant.

FPIs in indecisive mode

Despite the bounce in the current week, the FPI activity remained subdued in Index futures. The Long-Short ratio moved up from 34.21 percent on Friday, February 9 to 38.24 percent on February 16, 2024. Despite the FPIs building exposure to longs in the last week, they still continue to hold more short positions relative to long positions in Index futures.

The Put-Call ratio (PCR) indicated a divergence as of February 15. Divergence happens when both the price and the PCR move in the opposite direction. Nifty closed higher from 21,840 on February 14 to 21,911 on February 15, while the PCR at the same time closed lower from 1.198 to 1.174. This indicates bearish divergence. The market either consolidates or corrects briefly whenever there is a PCR-Price divergence.

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This happened earlier this month too when PCR-Price divergence was observed on February 2. The price moved up from 21,697 on February 1 to 21,854 the next day while the PCR slid from 1.237 to 1.185. This was the day when Nifty made an all-time high of 22,127 and fell nearly 2.70 percent until the low of 21,530 on February 14.

Bulls are in charge currently but Bears are waiting in the Wing

The India VIX, known as the fear indicator, took resistance around the 16.50 levels thrice since December 2023. The volatility cooled off every time the fear Index touched 16.50 levels, giving comfort to the bulls. A breakout above the 16.50 levels can charge up the bears who can drag the Index down. The fear gauge suffered marginal losses on Friday to close at 15.22.

Bears have an Upper Hand

The second maximum Put open interest for Nifty is placed at 22,000 strike while the maximum Call open interest is placed at 23,000 strike for the coming week expiry. The option activity 22,000 strike will provide cues about Nifty’s future direction. The Put writers (bulls) lead the Call writers (bears) by a good margin at the 22,000 strike.

The price took resistance around the 22,125 levels twice in the last one month. The Call writers (bears) have sizeable positions at 22,100 & 22,200 strike in Nifty. Unless the 22,150 level is taken out successfully on the upside, Nifty is likely to be choppy. The index is likely to gain momentum and move higher only upon Call writers exiting from these levels. A breakout and a follow up move past the previous all-time highs can lead to initiation of more longs. The level of 21,500 on the downside is likely to act as a strong support for the index.

The index took support around the 61.8 percent golden ratio Fibonacci retracement level of 21,512 and bounced sharply, drawn from the low of 21,137 made on January 24 to the high of 22,127 made on February 2, 2024. The index is now just 86 points away from its all-time high of 22,127.

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