Nifty heading for 3,720 level

F&O OUTLOOK

The markets on Tuesday snapped a two-day fall and rallied more than 4 per cent on short-covering and fresh long positions in index heavyweights such as Reliance Industries, ICICI Bank, State Bank of India, Larsen & Toubro and Infosys Technologies. Futures and options traders expect the Nifty to trade above 3,700 tomorrow as they unwind short positions at the 3,700 strike call.

The correction we saw on Monday was a blend of unwinding of long positions and profit booking. This is reflected in FIIs being net buyers in the cash market and stock futures. The Instanex FII Index of 15 stocks suggests that they were net buyers in Reliance Industries, Bharti Airtel, HDFC, Infosys Technologies and ICICI Bank on Tuesday. These stocks have outperformed the markets and FIIs have now considerable stake in these stocks.

Technically, the RSI support was intact and the markets closed above recent highs. While the bounce-back was expected, the extent of the rally was missed by almost all technical analysts. However, any move above the recent high of 3,720 will be bullish. At the same time, caution or tight stop-losses are called for given the high volatility in the markets.

The Nifty May futures witnessed unwinding of 4.40 million of short positions during intraday trades. Bloomberg data suggest that traders covered their short positions before noon and created long positions thereafter. The long build-up in index futures and unwinding of shorts at the 3,600 and 3,700 calls indicate fresh upside for the Nifty going forward.

The support is seen at the 3,600-level, while the trading pattern in put options suggests that 3,700 and even 3,800 may act as the support level in the near future.