As expected, the benchmark indices reversed early gains on profit-booking in banking, IT and metal stocks. Index heavyweights Reliance Industries and Larsen & Toubro also came off the day’s highs on profit-booking. On technical charts, the relative strength index (RSI) had turned extremely overbought yesterday and, thus, Tuesday’s correction was predictable.
According to technical analyst Ashish Shroff of Ambit Capital, this same trend was last witnessed in early February 2009 when the Nifty had corrected over 12 per cent from a high of 2,948 to a low of 2,573.
In Tuesday’s trade, the Nifty corrected 2.9 per cent from the day’s high of 3,017 to close at 2,931. This means that more correction is possible from this level.
Options traders, however, expect the Nifty to settle at around 2,800 when the current month’s contract will expire on March 26. The 2,800 put options currently hold an open interest of (OI) of 6.07 million shares, which is the highest among put and call options. The call options OI is higher at 2,900 and 3,000 and, hence, it is difficult for the Nifty to settle above 2,900 levels.
The Nifty March futures shed an OI of 3.52 million shares, mostly due to unwinding of long positions. The April futures, which closed at a premium to spot, as well as March futures, added an OI of 5.71 million shares, probably due to the blend of long and short positions.
However, the increase of OI in April futures was one third of the traded volumes, indicating that traders resorted to intraday profit-booking.
Two metal stocks – Hindalco and Tata Steel, which were trading in the overbought zone — declined sharply from their day’s highs on technical grounds. Shroff expects these stocks to correct further as technical indicators show a negative divergence.
F&O traders also see some corrections in these stocks, as negligible rollovers were seen in the April series despite a huge unwinding in the Nifty March futures.
The March futures of Hindalco shed an OI of 4.07 million shares, while the rollover in April series was negligible at 0.21 million shares.
Tata Steel’s March futures shed an OI of 2.47 million shares compared to a rollover of 0.75 million shares. National Aluminium, however, witnessed a short rollover as its April futures closed with a Rs 10 discount to March futures and added an OI of 1.12 million shares.
