Nifty may face stiff resistance at 23,600 this week

Mumbai: Options traders have baked in a maximum market upside at a key technical level of 23,600 points for the benchmark Nifty index for this week.

It remains to be seen if this hurdle is broken with the index having jumped 6.3% from the 4 March low of 21,964.6 through Friday's closing at 23,350.40.

The key level of 23,600 is the upper breakeven point for options sellers. If Nifty crosses it decisively, sellers would make huge losses. If the index expires at 23,350 this week, they would gain the maximum of ₹249 per share (75 shares make one contract).

If the Nifty breaches the lower breakeven point of 23,101 points, their losses will multiply.

The upper level of 23,600 coincides with the Nifty retracing 38.2% of the fall from the record high of 26,277.35 on 27 September to the nine-month low of 21964.6 on 4 March.

The total fall from the high to low is 4,312.75 points. A 38.2% retracement of that works out to 1647.47 points. What this means is from the low of 21,964.6, the Nifty rises first by 38.2% (1,647.47 points) to 23,612. If that's decisively broken, Nifty will aim for a 50% retracement , or rise 2,156 points from the 4 March low.

If Nifty covers 50% of the fall from its September high to the March low it will hit 24,120. These key levels of 38.2%, 50% and further on 61.8% etc are known as Fibonacci retracement levels, named after the 12th century Italian mathematician of the same name.

Also Read: Street has a spring in the step, but no bottom yet

The downside

Options traders have sold 23,350 level call and put options expiring on 27 March. Through this sale they pocketed ₹249 a share, or ₹18,675 per contract from the combined sale of the call and put contract.

This is their maximum profit. However, their losses can be huge if the Nifty rises well over 249 points or falls by more than 249 points from 23,350.

Assume the Nifty expires on Thursday at 23,800. The payout to the put option buyer would be zero but the payout to the call buyer will be ₹450 per share.

As the option sellers received a combined ₹249, their net loss would be ₹201 per share (450-249) or ₹15,075 per contract. As sellers tend to sell multiple lots, the loss would be huge. Similarly, if the Nifty tanks to 22,900, their loss would be the same.

The lower end of the range based on Friday option prices is 23,100. Options traders, as of Friday, expect the market to range between 23,100-23,600.

What led to the rise

FPIs net bought ₹6,576 crore worth of cash market shares last week, including Friday's provisional figure of ₹7,470 crore due to global index provider FTSE Russell rebalancing, adding to DII net but figure of ₹4,339 crore, taking total institutional buying to ₹11,809 crore last week.

Furthermore, FPIs sharply reduced their cumulative net shorts on index futures (Nifty and Bank Nifty) to 96,715 contracts last Friday from 184,034 net shorts at the end of the prior week (13 March). This resulted in a short covering rally.

FPI buying came on the heels of months of net selling (including secondary and primary market) since October due to rising bond yields in US and weaker rupee. Their total sales since then through 20 March total ₹2.44 trillion.

Analysts are mixed in their outlook on the rally.

Sriram Velayudhan, senior vice president , IIFL Capital Services, said that FPI flow resumption into India on a sustainable basis would take cues from Q4 results and the global tariff war outcome. He expects markets to top out around the current level in the medium term.

"Markets will take further cues from the Q4 results, which are likely to be lacklustre. However, we might not witness markets testing the 4 March lows," Velayudhan added.

Rajesh Palviya, derivatives and technical research head at Axis Securities, expects banks to outperform, and the Nifty to rally by another 500 points from current levels.

Also read | Unlocking global markets: How to diversify with portfolio management services

Market volumes

NSE trading volumes stood above the ₹1 trillion mark for three straight days with turnover on Friday totalling ₹1.6 trillion due to FTSE Russell rebalancing, which saw an estimated $1.4 billion worth of inflows, and likely tax loss harvesting. Friday's turnover contrasts with an average daily turnover of ₹93,606 crore so far this month.

A smaller part of the rising volumes recently is attributed by financial advisors such as Amol Joshi , founder of PlanRupee Investment, to tax loss harvesting, which is normally seen at this time of year.

Tax loss harvesting means realising losses of certain stocks in portfolios to offset the capital gains tax incidence on other stocks in folios during the financial yearend.

For instance, if one stock has returned a short-term capital gain of ₹75,000 and the other a loss of ₹50,000, an investor can use the loss to reduce short-term capital gain tax outgo of ₹15,000 (20% STCG) on the profit. That is, by realising and deducting ₹50,000 from ₹75,000 the net gain works out to ₹25,000. STCG (short-term capital gain) of 20% on this reduced tax outgo by a third amounts to ₹5,000.

Also read | Stock market mayhem: Will history repeat itself?