And Why the Nifty May Not Correct - GV

In my earlier post [Nifty Looks to Undergo Correction], I cited host of issues why the Nifty is looking weak - from conventional technical pointers - while I suggested a possible medium-term bearishness of sharp and sustained nature. Now I am presenting an effort to consider whether the turnaround is anywhere in sight.

In May, FIIs sold a cool Rs 12000 crore while DIIs bought a net Rs 6400 crore. Since then FIIs have been buying Rs 7700+, Rs 8300+ and in August Rs 4000 crore [on date of writing] against DII selling of Rs 4600+, Rs 6300+ and Rs 2300+ crore in August [on date of writing]. Obviously it is the FIIs who have been holding the index or certain segments of the market, or even certain stocks to their liking. This in spite of a 'possible distribution' by the Fourth Quater, as explained in earlier post.

All the reasons given in the earlier post - rising channel, index near the upper band, negative divergences in important oscillators cannot be facts that are tracked only by individual traders, but also by the FIIs.

But then simple common sense would demand that the FIIs should have been looking to hedge their positions in futures if they are getting to dig in to the last nickels from their bags of money. This in turn would make them want to hedge their positions - especially considering that one quarter of the market - the DIIs - have consistantly been selling which is a known factor to everybody.

So, do we see any sizeable hedging in futures? Actually we haven't seen any at all - both in index futures and stock futures unless they have done this in options.

In the index futures FIIs have net sold very nominal Rs 469 crore and in stock futures they have net sold another smallish Rs 432 crore in this contract month to date. Though in the previous contract month they had net sold Rs 2700+ crore and Rs 1000+ crore, while they had net bought an equivalent value in the June contract month - does not say much.

While their hedging in futures is rather thin, in recent days since 9th of this month, the OI in certain strikes - like from 5300 to 5500 - has gone up by about 44 lakh points in index puts, while it has gone up by only 10lakh points in index calls of strikes from 5400 to 5700. In these days of pessimism, I cannot think of retail investors writing put options and if the FIIs have a clear gameplan then they can very well do the writing - neither margin nor uncertainity would be a problem nor fear psychosis.

Secondly, the maximum pain theory workings reveal that the outflow for the writers shoots up sharply when the index goes below 5400 and not so much when it raises above 5500. Roughly said, a study of option trades suggests the Nifty is quite possibly biased on the longs.

To illustrate, as on closing of 13th the outflows to writers for current OI, if nifty were to close at various strikes would be as below:

5100 - 838
5200 - 506
5300 - 264
5400 - 154
5500 - 191
5600 - 354
5700 - 611

The lowest at 5400 is a misleading thing as it has remained so since beginning of the contract. It is possibly so that quite probably while somebody is buying calls, they themselves could be writing the puts, or vice versa, provided they are market trend deciders.

Because of this inference, coupled with the fact that I do not see much of futures selling by the FIIs, I am inclined to believe that Nifty could test the upper band of the rising channel and possibly break above it. If it so materialises then the bear trap and short covering can take it longer and farther in to the near term. We might even see a blow-off rally kind of move.

Distribution is best done in euphoria and accumulation is best done chaos.

The FII fund flow chart - black line for their derivative trades and white for their equity:

The indicators in the middle and bottom inner windows are results of my efforts to convert trades as indicators to issue buy and sell signals. A cursory look would reveal that the indicators have been quite decent even in these days of a rangebound trading. And notably there is no sell signal currently.

For a long time, I could not satisfy EW Neowave rules that I know of with my earlier counts. Recently I changed the count with [II] ending at last May's highs and [iv] as a Double combination ending at 4786 on May 25, with the 5th and final impulse of the larger 'A' in progress and many of my earlier problems seem to have been solved.

If we are in an impulse move from 4786 and it does so look then we could be in the (iv) sub-wave with (iii) only slightly larger than (i) and we might have ended a double combination at 5372 on 12th. If all of this is correct then 5625 and 5780 look quite in the realm of possibility in the near term.

Of course now the usual rider: In the days of mind boggling volumes in Nifty options and futures it may not be an issue for the funds to sharply increase their hedging levels in a very short time.