Nifty to stay below 5,400 in the short term

The Nifty August futures opened on a positive note, faced resistance at 5,440 and closed below the most crucial support level on account of selling from other time-frame traders. We had hinted, in this column yesterday, that there was a strong possibility of testing extend support at 5,350 and a resistance above 5,436.

The August futures settled at 5,340 after consolidating around 5,415 on concerns of rising rates stalling economic expansion and reducing corporate earnings. The market undercurrent remained weak and the intra-day fall from the day’s high of 5,440 could take the August futures to around 5,241.

The August futures may face strong resistance above 5,415-5,440, as other time-frame traders were net sellers in that range. The market profile for the day suggested responsive selling as the index opened within the value area (5,360-5,425) and made an attempt to trade above the value area. Sellers entered the market and auction prices were back into the value area. Also, the selling occurred within yesterday’s value and the market closed below the day’s value and hence it was considered responsive selling. It was a net selling day as TPO counts above the point of control (PoC-5,415-5,420) were higher at 69 per cent.

The trading pattern in the August futures below 5,360 suggests significant short covering at the lower level. The August futures saw significant selling above 5,415 which indicate profit booking at the higher level. Traders were net sellers in the 5,390-5,415 range. The initial balance (IB) range (5,405-5,440) saw change of hands and selling from top traders. The market picture chart hinted at an upside resistance at 5,505, but continued volume-based selling can take the August futures below 5,300 tomorrow. Strong support is expected to come around 5,240.

The trend is likely to remain weak in the immediate future, with options traders covering significant short positions in 5,300-strike put options. Sensing the weakness the trading activity in the 5,200-5,100-strike put options increased substantially, as participants bought above strike puts to protect long positions in index futures. The Nifty will stay below 5,400 in the near future and, hence, they have increased short positions in 5,400-strike call options. The buy-side volume was seen in the 5,400-strike call options which indicate hedging of short positions in August futures.

The key stocks futures that dragged the index down are expected to see some more corrections in a day or two. ITC was expected to see a volume-based decline to around 195 and price-based resistance above 203.