Markets Are On A Downward Break

Today’s market Setup
FIIs have increased their short futures positions in Gift Nifty and Bank Nifty, with a more pronounced addition in Bank Nifty. In Index options, FIIs have also added long put positions and short call positions, both of which are strategies used when expecting prices to fall. FIIs have also increased short positions in Stock futures. These actions collectively indicate that FIIs are bearish on Indian indices.

Proprietary desks are showing a mixed sentiment. They are bullish in Index and Stock futures, but bearish in options. Meanwhile, retail investors are displaying bullish sentiment in Index futures, Stock options, and Index options.

DIIs have taken a bearish stance in Stock Options but remain neutral in Index Futures and Options. This creates an overall tussle between FIIs and clients, with FIIs being bearish while clients are bullish.

Despite this conflict in market sentiment between different groups of investors, the overall market setup appears bearish. This suggests that FII views may have a stronger influence on market sentiment at present.

Gift Nifty is flat at 6:30 AM this morning. In the US, the Dow Jones Industrial Average has closed higher by 123 points, while the Nasdaq has closed lower by 70 points. Taking cues from Gift Nifty, the Nifty50 index is expected to open flat at yesterday's close, which is below its key moving averages. The 10-day Exponential Moving Average (DEMA) is placed at 23389, and the 20-day DEMA is at 23400.

Foreign Institutional Investors) are short in all segments of the market, which means they are betting on price decreases. We can expect profit-taking if the market opens with a gap up. It's important to watch for fresh additions of call and put options at the 23100 level during morning trades. A substantial increase in call options could create downward pressure, while an increase in put options could lead to upward pressure.

The Implied Volatility has also spiked, which can influence market movements. Current data suggests that Nifty50 should remain within a range of 200 points, between 23000 and 23200. Any rise in the markets will be seen as an opportunity to sell, as it has become a "sell on rise" market.

If Nifty50 breaks and closes below yesterday's low, it could potentially head towards the lower level of 22785. This is a crucial level for Nifty50, as it represents the swing low of January 28, 2025, and is also the level from June 7, 2024, from where Nifty started its upward march towards its highest point of 26277.

Bank Nifty has broken its previous trading range and has started trading lower. Now, the 10-day Daily Exponential Moving Average placed at 49726 and the 20-day DEMA placed at 49641 will act as resistance levels. This means that if the price approaches these levels, it may face difficulty in moving higher. Any rise in the markets towards these levels is considered an opportunity to sell.

The Bank Nifty is in a lower high and lower low pattern. This pattern occurs when each peak and trough in the price action is lower than the previous one, indicating a downward trend. Bank Nifty is also now considered a "sell on rise" market, meaning that traders are looking to sell when prices increase temporarily.

The markets appear extremely oversold. It’s possible for a short and sharp counter-trend rally or a short-covering rally to happen at any time. A short-covering rally occurs when traders who have bet on price declines (short sellers) buy back shares to close their positions, causing a temporary price increase.

Overall, the data seems to be suggesting a day of consolidation with a bearish tone. 

 

Options Chain
Nifty 50 (Expiry February 13)
The option chain of  February 13 shows that the chain is heavily loaded in favour of call writers. Call writingis aggressive at every level from 23000 onwards till 24000, indicating strong resistance at each level. This suggests that traders expect the market to face difficulties in moving above these levels.

Puts have been rolled down from 23000 to 22700, meaning traders are adjusting their positions to lower strike prices. Some meaningful put writing is visible at 22700 followed by the 22500 level, which shows growing confidence among put writers at these levels. We said on Tuesday that 22785 is a crucial level--the market appears to be preparing for this. Put unwinding at the 23000 level demonstrates a lack of conviction for puts at this strike price. Overall, the option chain appears weak for bulls, suggesting a bearish sentiment. The IVon the put side is 15.65 and 18.37 on the call side, indicating higher uncertainty for upward movements.

Bank Nifty (Expiry February 27)
Not much has changed from Monday for Bank Nifty options. There has been heavy call writing today, indicating expectations of limited upside potential. The conviction of put writers seems to be rolling back from the 50000 level to the 49500 level today, suggesting a shift in sentiment towards lower levels.

With 1.33 million puts written at 49000, this level will likely serve as support for Bank Nifty. Similarly, with 1.51 million in call writing at 51000, this level is expected to act as resistance for Bank Nifty. These large open interest positions at these strikes indicate strong market expectations around these price levels. The Implied Volatility on the put side is 16.25 and 18.02 on the call side, showing higher uncertainty for upward movements in Bank Nifty as well.

Support and Resistance
 - Nifty50 : Major support is at 22700 and major resistance is at 23500.
 - Bank Nifty: Major support is at 49000 and major resistance is at 50000.
 - Sensex: Had its weekly expiry today. Will wait till tomorrow for new formation. 

Put Call Ratio and at-the-money
 - Nifty50: Overall 0.50 and at ATM 1.02 (Neutral to Bearish)
 - Bank Nifty: Overall 0.7 and at ATM 1.18 (Neutral to Bullish)
 - Sensex: Had its weekly expiry today. Will wait till tomorrow for new formation.