F&O Outlook: 4,910 is the key support

The Nifty closed below the 5,000 mark on short build-up in October futures, weak technology stocks and profit booking above the 5,050 levels. The rise in trading volumes on Futures & Options (F&O) segment in the last two days suggest that weaker hands are moving in while smart money is moving out of the market. The Nifty October futures have strong support at the 4,910 levels, but if it closes below this level, we may see fresh correction up to 4,750 levels.

Technically, the rally above the 5,050 levels can only be understood as “eyewash” as it did not have any backing from the technical studies, says technical analyst Gautam Shah of JM Finance. The set-up is weak at this point with a number of bearish developments. The index has corrected exactly from the 5100 and a bearish “Evening Star” formation has also emerged on a daily chart. To top it all, based on Elliot studies a large wave up could have got completed says Gautam.

The Nifty October futures has also given weak signal as it closed at 10 point discount to spot and added 828,100 shares in open interest (OI) indicating short build. The Bloomberg data suggest that bears have covered their short position when the Nifty was trading below the 5,000 levels and build-up short above the 5,040 levels. The change of hands also seen above the 5,050 levels indicating smart money moving out of the market.

There trading volumes was significantly higher at 5,000-5,100 strike calls and 4,900-5,000 strike puts. The Bloomberg data suggest that the traders were booking profit during the morning session when the Nifty was trading above the 5,050 levels building fresh short when the Nifty started trading below the 5,050 levels. The traders were writing 5,200 call options as they expect that the Nifty unlikely to move above the 5,200 in the near future.

The 4,800-5,000 puts witnessed unwinding of short positions while the 4,700 put added 540,600 shares in OI mostly through change of hands as buy and sell side trades were evenly matched. This means, the Nifty expected to decline below the 4,800 levels if it closes below the 4,910 levels with a downward target of the 4,750.