Market Will Take Its Direction From Global Cues, Mainly The US

Today’s setup

Gift Nifty 50 is currently trading on a neutral note, showing a slight positive gain of 17 points. Fresh perspectives on its movement will be clearer today morning. With implied volatility  at comfortable levels and the derivative setup indicating consolidation, Nifty 50 appears to be stabilising around its current levels. Key support levels to watch are the 10-day exponential moving average  at 23,284 and the 20 DEMA at 23,341, which are expected to act as strong support zones for Nifty 50. The Nifty 50 should be range bound for a couple of days. Iexpect this week’s expiry to happen between 22300 to 23500. India Vix after rising with the opening tick has also come down to close at 14.35, which is well within comfort range.

Options Data and Market Sentiment
The options statistics for this week suggest that Nifty 50 is likely to trade within a limited range. Foreign Institutional Investors  are currently short in both futures and options, which is a bearish signal for the market. On the upside, Nifty 50 seems to be capped at 23,500, while on the lower side, key support levels are at the 20 DEMA (23,341) and the 10 DEMA (23,284). Additionally, the 23,300 Put writers have a significant presence, with 79 lakh puts in the Nifty 50 option chain, making 23,225 a crucial level to watch.

If Nifty 50 slips below 23,225 and closes convincingly below this level, it could trigger short-covering by Put writers, potentially pushing Nifty 50 further down. In such a scenario, the next key levels to watch would be the psychological mark of 23,000, followed by 22,800, which acted as a strong support level during Nifty 50's upward rally starting on Jan 27. 

Watch out for
- Support Levels: 10 DEMA (23,284) and 20 DEMA (23,341) are critical support zones.
- Resistance: Nifty 50's upside is capped at 23,500.
- Bearish Signal: FIIs being short in futures and options indicates a cautious market sentiment.
- Crucial Level: A close below 23,225 could trigger further downside, with 23,000 and 22,800 as the next target

Yesterday’s action

Spot
Nifty 50 opened with a substantial gap down of 162 points. The selling pressure persisted from the opening bell, pushing the index down by another 100 points. This downward movement breached the 10-day Exponential Moving Average (DEMA), with Nifty 50 touching its intraday low of 23,222.

However, the bears couldn't maintain their grip, and Nifty 50 began a gradual ascent. The index climbed to an intraday high of 23,381, which also became its closing level for the day. This closing price was higher than its opening of 23,319, providing a silver lining to an otherwise challenging day.

Another positive takeaway was Nifty 50's ability to regain and close above the crucial 20-day Exponential Moving Averageof 23,341. Despite the turbulence, 16 out of 50 Nifty 50 stocks managed to end the day in positive territory.

Bank Nifty mirrored Nifty 50's movement by following a similar pattern, opening 432 points lower. It reached an intraday low of 48,909 before gradually rising to an intraday high of 49,363. The banking index closed at 49,210, unable to hold above the important 20-day EMA of 49,325. Only three out of 12 banking stocks closed in the green.

Mixed Performance was seen across other Indices as he broader market faced significant pressure:

Nifty Next 50: -1.37%
Nifty Midcap: -0.93%
Nifty PSE: -3.20%
Nifty CPSE: -2.71%
FMCG: -1.67%

However, there were a few bright spots as Nifty IT recovered impressively, gaining 1,000 points to close 0.68% higher, and Nifty Consumer Durables ended the day up 0.55%

In our morning report yesterday, we had said that a convincing break below the 10 DEMA would lead to a downward movement in Nifty 50, but this scenario did not materialise. Although Nifty 50 initially dipped below the 10 DEMA, it failed to produce a significant follow-up red candle below this level. Instead, it began trading at or above the 10 DEMA, using it as a support level. The bears were unable to push Nifty 50 lower, while the bulls successfully drove it higher, ultimately reclaiming the 20 DEMA. Nifty 50 closed the day above the 20 DEMA, demonstrating resilience.  It appears that our markets have already factored in both the impact of the recent budget and the anticipated decline in US markets, considering the drop in Dow and Nasdaq futures. This suggests that today's trading has likely accounted for these potential influences on the market.

The Indian stock market experienced a volatile session yesterday , with both the Nifty 50 and Bank Nifty indices opening significantly lower but managing to recover some ground by the close of trading.

F & O
Foreign Institutional Investors  displayed a clear bearish stance. They actively shorted futures, shorted calls, and covered puts, signalling a cautious or negative outlook. Additionally, some profit booking was observed in stock futures, further reinforcing the bearish sentiment.

On the other hand, retail investors  maintained a bullish position across all derivative segments. They are long in futures, long in calls, and short in puts, reflecting their optimism. However, proprietary traders presented a mixed bag of positions, indicating uncertainty or a neutral stance.

Domestic Institutional Investors showed a mildly bullish stance in index futures but turned strongly bearish in stock futures, suggesting a preference for hedging or risk mitigation in individual stocks.

The broader market setup appears bearish, driven by  aggressive short selling and profit booking in stock futures.

Nifty 50
The 6th February 2025 option chain for Nifty 50 showed significant all writing from 23400 level up to the 24000 level. In contrast, some put writing is evident at each level from 23300 down to 22800. However, the conviction of ut writers appears weaker compared to that of call writers, with notably more call writing than put writing overall.

Major support was seen at 23000, marked by the maximum put open interest (OI) of 9.0 million contracts. Substantial resistance was seen at 23500, with 12.7 million contracts in call writing, as well as at 24000, featuring the maximum OI in call writing at 18.3 million contracts.

It appears that the Nifty 50 Index is preparing to consolidate within a narrow range of 100 points, between 23300 and 23400, for this expiry.

Interestingly, the implied volatility for call options is higher compared with put options. This discrepancy in IV suggests the possibility of a short-covering rally, where traders who have gone short on  may need to buy back their positions, potentially driving prices higher.

This configuration indicates a mixed outlook, with strong resistance levels established above the current price, but also the potential for a short-term upward movement due to possible short covering.

Bank Nifty
Bank Nifty further consolidated, with increased put writing observed at every level from 49000 downwards. This suggests a strengthening bullish sentiment among options traders. Key levels to watch:

The 49000 level has the highest number of put options, with 12.33 lakh contracts. Traders have added another 1.46 lakh puts at this level. This makes 49000 a strong support level for the Bank Nifty.

The 50000 level is shaping up to be a key resistance point. It has the most call options, with 9.84 lakh contracts. Traders have added 1.43 lakh more calls at this level. This suggests that 50000 could be a tough level for the Bank Nifty to break through.

Based on this, it looks like the Bank Nifty might trade between 49000 and 50000 until this expiry. 

If it breaks decisively above 50000 or below 49000, it could signal a significant change in the market's direction.

Support and Resistance

Nifty 50: Major support is at 23000 and major resistance is at 23500.

Bank Nifty: Major support is at 49000 and major resistance is at 50000.

Sensex: Major support is at 77000 and major resistance is at 78000.

Put-Call ratio and At-the-Money

Nifty 50: Overall 0.74 and at ATM 0.70 (Bearish)

Bank Nifty: Overall 0.80 and at ATM 0.80 (Bearish)

Sensex: Overall 0.97 and at ATM 0.92 (Neutral to Bearish)