Current pullback nearing its end

The key benchmark indices came off sharply from their day’s high in late trade as IT and banking stocks pared gains. The BSE Sensex fell below 9,000 levels from an intraday high of 9,120 to close at 8,977, while the Nifty closed below 2,800 after making an intraday high of 2,836. Technical analysts take the indices’ testing of higher levels and then retreating towards close of session as a sign that the current pullback is nearing its end.

The trading pattern in Nifty March futures has already confirmed this trend as its discount to spot increased from 3 points to 15 points. Traders had built up an open interest (OI) of 4.21 million shares intraday but, at close, they declined by 741,300 shares, indicating unwinding of long positions. April futures continue to add short positions as is evident from the fact that OI increased by a further 1.44 million shares to 7.97 million shares.

The 2,800 strike call options changed a lot of hands with unwinding of long positions and a build-up of fresh short positions. Trading data suggests that the Nifty will face strong resistance at 2,800 as call options at this level will have the highest OI among all call options.

Also, long traders were not willing to hold the 2,800 call till expiry, which was seen in OI despite a trading volume of 36 million shares in the last two days.

The build-up in 2,800 put options has been increasing by almost one million shares every day, indicating that traders are hedging their long positions in the Nifty March futures by buying 2,800 strike put. However, support for the Nifty is seen at 2,700 as put OI of 7.7 million shares at this strike is the second-highest among all put options.

Incidentally, the 2,500, 2,600 and 2,700 strike put options currently hold an OI of 23.1 million shares, which is 52 per cent of the total OI in put options. This means that the Nifty could get support at every low, before finally falling below October 2008 lows.