The Nifty extended the losing streak that has been on since the start of this month. Except for media, realty and PSU banks, all key Nifty sectoral indices slipped below their respective 10-day SMAs. And most of these have also dipped below their 20-day SMAs, except for auto, FMCG and IT, which are still around 2.5% above the same, while metals are positive, but the distance from the 20-day moving average is under 1%. In short, the majority of the sectors have pulled back enough to raise fears of a larger crack.
Meanwhile, boosted FIIs appeared to have stopped positioning for a rise, having put a stop to short covering of their index futures, a trend that had been visible since late July. FIIs’ action on Friday reflected the same, despite Nifty appearing to hold support and refraining from large falls. FIIs boosted shorts by 3%, while reducing longs by 7%.
Weekly data shows that this trend is more pronounced, with shorts seen boosted by a whopping 14.7%, though longs were reduced by just 2%. This turn of events has driven the long-short ratio of the FII index future segment to just 7.8, the lowest this month, and is closing in on record lows.
The Nifty Realty Index appears to be setting the stage for a possible upside move, as price action continues to tighten within a narrowing trading range. Such compression often signals that a directional move may be approaching.
Momentum, too, is beginning to show early signs of improvement, with the daily MACD moving closer to a bullish crossover. At the same time, the relatively muted volumes during the recent consolidation phase suggest that selling pressure has not been particularly aggressive.
Derivative positioning adds further support to this constructive view. On Friday, nearly 70% of realty stock futures saw either fresh long build-up or short covering, pointing to improving trader sentiment and a growing expectation that the sector could attempt a near-term rebound.
Heavyweights such as DLF, Oberoi Realty, and Lodha Developers are also beginning to show signs of stabilising after their recent decline, and their participation could be important in leading the next leg of recovery. A sustained move above the current consolidation zone would strengthen the case for a move towards 915-930. On the downside, 875 remains a key support level that needs to hold for the positive bias to stay intact.
The Auto index, on the other hand, is beginning to show signs of fatigue after running into resistance near the upper boundary of a rising wedge pattern. This raises the risk of a short-term corrective move, especially as momentum indicators have started to soften.
The daily MACD is now close to slipping below its signal line, suggesting that the earlier bullish momentum is gradually losing strength. Derivative data also reflects a more cautious undertone.
Nearly 65% of auto stock futures witnessed long unwinding on Friday, while around half of the constituents saw either long unwinding or fresh short addition on a week-on-week basis. This points to fading bullish conviction among traders and suggests that participants may be using higher levels to book profits.
Key constituents such as M&M, Maruti Suzuki, Bajaj Auto, TVS Motor and Eicher Motors remain vulnerable to additional profit booking, which could weigh on the broader sector performance. The index is likely to find initial support in the 29,050-29,000 zone. A decisive break below 29,000 may open the door for a deeper decline towards 28,535, while 29,800 remains the important resistance level to watch on the upside.
The author is Anand James, Chief Market Strategist at Geojit Investments.
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