F&O Outlook: Nifty likely to fall below 2,700

As expected, the Nifty rallied from today’s low of 2,767 and closed with a 13-point gain on short-covering.

However, the trading volume on the futures and options (F&O) segment remained critical as it declined by Rs 11,000 crore. The decline took place as traders were wary of taking intraday positions.

Futures of key stocks such as Reliance Industries (RIL), State Bank of India (SBI), ICICI Bank and HDFC moved in a narrow range throughout the day on lack of buying support. Nifty February futures moved in the range of 40 points as its turnover declined from 667,736 contracts yesterday to 412,706 contracts today.

The market setup continued to be extremely weak, which might lead to extensive damage in the coming days. The only consolation for the bulls is the oversold setup on the daily chart that could lead to a pullback anytime in the near term if the Nifty closes above 2,800.

But if the Nifty loses its support of 2,720 and closes below 2,700, then the index will not take much time to test the 2,600-level. However, with only five trading days remaining before the expiry of the February series, the current holding pattern in Nifty call and put options suggests that the index is unlikely to close above 2,800, but may fall below 2,700.

The Nifty February futures shed an open interest (OI) of 1.44 million shares, while its March futures added an OI of 2.32 million shares, indicating unwinding of long positions and build-up of short positions. Unwinding was seen in 2,600 and 2,700 call and put options, indicating that the Nifty was losing its support base of 2,700 and might even go below 2,600.

Among stock futures, a significant profit-booking at higher levels was seen in RIL, ICICI Bank, SBI and Infosys as the Bloomberg data suggested that 50-55 per cent volume in these futures had taken place above the day’s average levels.