F&O Outlook: Volume-based correction can take Nifty to 5,405

The Nifty August futures expectedly tested the lower end support of 5,430 and closed higher at 5,467 on short covering. The buy-side trades in the value area (5,448-5,478) and below 5,460 arrested the steep decline. The floor traders were buyers in the morning sessions after the August futures slipped below 5,450. The other time-frame traders were net sellers in the range established in the first two TPO time periods. The initial balance (IB) range (5,468-5,498) saw change of hands, and sell-side trades from top traders. Interestingly, the futures settled around the midpoint of the day’s range indicating buyers/sellers equilibrium.

The trading pattern in the August futures in the last two hours suggests a modest recovery to around 5,500 tomorrow. The August futures saw significant volume-based buying range extension up to 5,470 from day’s low of 5,430. This pullback accounted for 33 per cent of the day’s volume, mostly through buy-side trade. The market picture chart hints at a positive opening and an upside potential around 5,505. However, significant volume-based correction can take the August futures around 5,405.  The spot Nifty is expected to get support at around 5,392 and likely to face strong resistance around 5,480.   

The market sentiment has worsened after 50 basis points hike in interest rate by the RBI and an indication of further increase if needed to tackle inflation. The reduction in earnings forecast for the Sensex Companies by Credit Suisse Group AG by 1.25 per cent in July to RS 1,188 weakened the sentiment. The options traders expect the Nifty to trade below 5,500 in the near future and hence they have increased short positions in 5,500-strike call options and covered short positions in the same strike put options. The change of hands in 5,400-strike put options also hinting at a trade below 5,400 in the near future.

The key stock futures that drag the index down are expected to see some more correction in a day or two. The MKTP chart is hinting fresh decline around 2,723 and resistance above 2,770 for Infosys Technologies. ICICI Bank is expected to see volume-based decline around 1,007 and price-based resistance above 1,047. State Bank is likely to move down around 2,225 and face resistance above 2,350.