Pullback likely to continue next week

The trading pattern in Nifty futures and options (F&O) in the past couple of sessions indicates return of normalcy and a close above 4,800 for the S&P CNX Nifty. After opening on a positive note, Nifty closed at 4,827 on short-covering at higher levels. Nifty February futures closed at a premium to the spot for the first time in the current month’s series, indicating short-covering by major F&O players.

The pullback is expected to continue next week as Nifty February futures saw short-covering of over three million shares. Bloomberg data suggest change of hands from sellers to buyers above 4,833 and short-covering around 4,810.

The foreign institutional investors’ open interest in index futures come down sharply by over five million shares last week, mostly through buy-side trades, indicating short-covering.

Short-covering was seen in out-of-money as well as in-the-money calls as participants expected the pullback to continue for some more time. They expect fresh upside around 4,900 as this strike call shed one million shares in open interest, mostly through buy-side trades. If global markets remain firm on Friday, we may see gap-up opening on Monday. The domestic markets are closed on Friday on account of Mahashivratri.

A convincing close above 4,800 has changed the entire short-term matrix and strong resistance levels will now act as support levels. The 4,800 put has seen strong build up in open interest through sell-side trades, while the 4,900 put has been adding fresh open interest in the last couple of days through sell-side trades. The open interest in 5,000 put options came down sharply by one million shares last week through sell-side trades, indicating profit-booking.