Nifty continues to sell off, oversold position may trigger a bounce

The Nifty index experienced sustained selling pressure during the last week, closing on a bearish note on Friday. The index remains below its ten-day low, indicating a weak structure.

On the hourly chart, the Nifty is trading below its 20-period exponential moving average (EMA), the Relative Strength Index (RSI) is struggling to hold above the 60 level since early October, reflecting limited buying momentum and the upper Layers act as resistance. zone

As the index approaches the critical psychological level of 24,000, where significant put writers (bulls) have taken position, momentum indicators reaching oversold levels may signal a temporary recovery.

Open interest trends

The Nifty closed the week with open interest (OI) of 15.33 million shares, down from 15.61 million shares at the start of the week on October 18. This represents a 0.28 million decrease in futures OI from earlier this week. 2.71% decline in the index, indicating significant unwinding of long positions.

Decrease in FPI long-short ratio

The long-short ratio of foreign portfolio investors (FPIs) saw a slight increase, with long positions rising to 36.71% by the end of the week, from 33.57% at the start of the week on October 18, though still below 79.39%. Observed at the beginning of the end of October. This trend indicates a modest increase in FPI long positions as short positions have gradually reduced.

Major weekly series levels

In the weekly range, the 24,500 strike has significant call open interest with 295,090 contracts, while the 24,000 strike has strong put interest with 198,997 contracts.

Active trading in 24,200–24,500 call range and 23,900–24,100 put range suggests resistance around 24,200–24,500 and support between 23,900–24,100.

An increase in call writing in the 24,200-24,500 zone indicates that sellers are establishing positions at lower levels, while a reduction in put positions underscores the bearish sentiment, preventing the significant institutional selling index from holding higher levels.

Outlook for next week

With the index trading near its crucial support zone of 24,000–24,100, with significant put writer positions, oversold momentum indicators and FPIs halting their selling streak to become net buyers in the last three days, a minor pullback looks possible. However, with strong resistance in the 24,500-24,800 range, this rebound could be short-lived, potentially prompting new short positions by sellers. Decline in open interest along with decline in index indicates long unwinding.

If the index falls below 24,000, a new short position can be considered, potentially increasing profit taking sharply. When the index remains below 24,700–24,800 levels, a ‘sell-on-rise’ strategy may prevail.

Historical data shows that four consecutive weeks of negative closes typically signal an average pullback of 1.00% in the following month, which traders should keep in mind when planning for the coming week.

(The author is Derivatives Analyst, SAMCO Securities. Views are his own)