Strong resistance likely if Nifty rises above 4,800

The Nifty staged a modest recovery during the special trading session on Saturday on steady global markets and short-covering. It lost its crucial support of 4,800 on Friday and is trading comfortably above its support at 4,700. The big worry for the market is formation of short positions by foreign institutional investors (FIIs).

Nifty February futures closed at a discount to the spot and added 1.47 million shares in open interest over the week, indicating fresh weakness.

Global cues were uncertain as Dow Jones closed in a Doji pattern on Friday. Technical support for the Nifty is around 4,700 while the real support level is at 200 DMA (daily moving average), which is placed at 4,650.

Short formation by FIIs was visible in index futures as these institutions were net sellers in three out of five trading sessions last week. Though FIIs’ open interest in index futures remained unchanged over the week-ago levels, it has increased sharply by 61,000 contracts in the last two trading sessions through sell-side trades. This means FIIs booked profit at index levels above 4,900 and initiated short positions thereafter.

The trading volume in Nifty put options suggests that participants have covered short of over three million shares in 4,800 and 4,900 strike puts and bought one million shares in the 4,700 put. The participants expected the Nifty to trade below 4,700 in the near future as the 4,700 strike call options added 1.08 million shares in open interest, mostly through sell-side trades.

This means the bulls will find it difficult to stage a comeback with support levels turning resistance levels. The 4,800-5,000 calls now hold 14 million shares in open interest while 4,500-4,700 puts hold 14 million shares in open interest.