Short-term correction ends

The Nifty tested its support of 5,180 and closed convincingly above its trendline support zone, indicating the end of short-term correction and fresh upside ahead. The Nifty January futures closed at 10 points premium to the spot, while the open interest (OI) remained unchanged despite an intraday build-up of 1.59 million shares. This indicates short-covering from bears. The trading pattern observed from intraday volume chart suggests change of hands, mostly from sellers to buyers. This is considered to be bullish. The Nifty February futures closed at 17 points premium and added one lakh shares in OI, indicating a pullback rally ahead. Technically, the Nifty has given a positive close after testing its support of 5,180 for a fresh rally. In the light OI build-up in call options, the near-term resistance is seen at 5,300. However, the trading volume in the 5,300 call option suggests limited build-up of OI in this call in the last few days.

However, the trading volume in the 5,300 call option suggests limited build-up of open interest in this call in the last few days. This means short-covering and change of hands from bears to bulls, as the participants expect a possible breakout above the resistance level of 5,310. Interestingly, 5,200-5,400 calls together shed 0.46 million shares in OI, mostly a blend of buy and sell-side trades.

Some unwinding was visible in put options at the 5,200 strike and above, mostly through sell-side trades, indicating a possibility of the index closing above the 5,300 level going ahead. Interestingly, 5,000-5,200 puts hold highest OI among all puts, suggesting that the index may not come down significantly below the 5,200 level if it loses support of 5,150. The immediate worry for the market has been shorts build-up by foreign investors in index and stocks futures.