Derivative trading trends indicate market rally slowing down

PALAK SHAH Mumbai | Updated on July 09, 2020 Published on July 09, 2020

India’s stock market frenzy may witness a likely pause in the coming days, if one purely goes by the derivatives trading data, analysts told BusinessLine. The derivative open interest, a gauge of pending positions, is showing a negative divergence, in the sense that strong hands are turning cautious, analysts said.

On Wednesday, the Nifty and the Bank Nifty index, two of the largest traded derivative contracts, witnessed a sudden sharp fall in the last 45 minutes of trading. The Bank Nifty index fell nearly 2 per cent or more than 500 points from the day’s high and the Nifty index was down 93 points 0.9 per cent at close. This was on the back of a sharp fall in open interest (OI) positions in the futures segment, the data showed, which means that some big players were unwinding their bullish bets. As per market closing data on Monday, the OI in the Bank Nifty index stood at around ₹3,750 crore; this spiked to more than ₹4,500 crore during intra-day trade, as the index registered gains of more than 500 points. There was an intra-day spike of more than 20 per cent in the Bank Nifty OI. But as the markets approached the closing time, the OI started falling and stood at around ₹3,770 crore. It was down more than 15 per cent from the day’s high. As per analysts, this showed that some strong hands got off the markets when the Bank Nifty was trading higher. The Bank Nifty index touched an intra-day high of 23,080 but closed the day lower at 22,584. For the Nifty index, the OI at Monday’s close was around ₹14,500 crore and did not see much rise in intra-day trading on Wednesday. At the day’s close, the OI stood at ₹13,500 crore, down nearly 6.9 per cent from the previous day.

In the options segment, the book makers or the writers who are market makers, reduced the pace of selling ‘Put’ options. A Put option is taking a bearish view on the markets, and Call is its opposite. When market makers decline to sell Put options it means they are expecting the markets to fall in the near term and do not want to give the Put option away at a lower rate as they anticipate its price could move higher when markets fall. The Nifty and Bank Nifty index both have so far managed to gain around 44 per cent from the lows they touched in March on the back of panic selling due to the Covid-19 scare. Since, then it is for the first time that the Put-Call ratio showed a negative divergence.

The Put-Call ratio of the market-wide OI made a high of 1.26 when the Nifty was at 10,328. That means, 1.26 Puts were outstanding against every one Call. This Put-Call ratio came down to 1.16 when the Nifty index rose to around 10,550; it is now down to 1.12. Simply put, less number of Puts are being sold and book makers have now started hoarding them.

“This declining trend in market internals is also witnessed in the advance-decline ratio that is making lower peaks when the Nifty is making higher peaks. This is a negative divergence that shows the weaker breadth and participation at higher and higher levels and is an advance warning of a market correction in the days ahead either to 10,600 or 10,300. Wednesday’s jump in volumes on a down day may be the first sign that a correction has started. But how far the markets will fall below 10,300 remains to be seen, based on the build-up in derivatives when we reach there,” said Rohit Srivastava, Chief Strategist, IndiaCharts.

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Published on July 09, 2020
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