Support at 2,870 crucial for Nifty

Markets are, technically, in the overbought zone with the Nifty put-call ratio for February options staying at 1.44, much higher than the normal range of 1-1.25.

The Nifty at 2,934.50 is trading critically below the 61.8 per cent Fibonacci retracement level of 2,962, considering its rally from 2,661 to 3,147.

If the index fails to close above 2,962, then it may retrace to the 2,662-level. The index on Tuesday declined sharply from its intraday high of 2,957 to get support at 2,870 before recovering.

These are signs of weakness and, hence, if the Nifty breaks the support at 2,870, then 2,660 is not very far.

Nifty February futures witnessed short-covering during the morning trade with 34 per cent shares changing hands in the first 90 minutes. Participants started booking profit when the index came closer to its 61.8 per cent retracement level of 2,962.

The Bloomberg data showed that 31 per cent trades had taken place in the post-noon session, mostly through sell orders at an average of 2,913.

Final hours of trading witnessed high volatility as the index plunged into the red before recovering to end the day on a positive note. The index closed above 2,900, thanks to short-covering during the last 30 minutes of trade.

The February Futures were trading in a range of 8-12 points discount to the spot for the major part of the session, but closed with a seven-point discount, indicating short-covering.

The February futures shed an open inertest (OI) of 28,050 shares, while the March futures, which closed at a five-point discount to the February futures, added an OI of 145,350 shares.

This indicates that F&O players have covered short positions in February contracts and created short positions in March contracts.

Options traders unwound short positions at 2,800 and 2,900 calls, indicating formation of support levels. They also wrote 3,000 calls, suggesting resistance.

They hedged their short positions at 3,000 strike calls by buying 3,100 calls. Profit-booking was seen at 2,700 puts, indicating that traders expected the Nifty to trade above 2,700 in February series.