As India approaches the final phases of the Lok Sabha elections, the financial markets are reflecting the underlying tension and uncertainty typical of such significant political events. The Nifty Futures May contract has notably shown signs of extreme exhaustion, suggesting a turbulent period for investors.
Market Overview
In the lead-up to the election results due on June 4, 2024, the Indian markets have experienced a chaotic trading environment. The India Volatility Index (VIX), a measure of market risk often referred to as the “fear gauge,” has surged to over 18, indicating heightened nervousness among investors.
| Date | FII Gross Purchase | FII Gross Sales | FII Net Purchase/Sales | DII Gross Purchase | DII Gross Sales | DII Net Purchase/Sales |
|---|---|---|---|---|---|---|
| Month till date | 83,889.44 | 106,747.44 | -22,858.00 | 87,666.78 | 70,966.59 | 16,700.19 |
| 09-May-2024 | 11,353.03 | 18,347.89 | -6,994.86 | 16,351.32 | 10,708.79 | 5,642.53 |
| 08-May-2024 | 11,984.54 | 18,653.64 | -6,669.10 | 15,333.26 | 9,404.45 | 5,928.81 |
| 07-May-2024 | 13,726.76 | 17,395.60 | -3,668.84 | 13,202.80 | 10,898.30 | 2,304.50 |
| 06-May-2024 | 12,598.23 | 14,766.98 | -2,168.75 | 13,791.15 | 13,009.76 | 781.39 |
| 03-May-2024 | 17,440.08 | 19,832.06 | -2,391.98 | 13,865.92 | 13,175.40 | 690.52 |
| 02-May-2024 | 16,786.80 | 17,751.27 | -964.47 | 15,122.33 | 13,769.89 | 1,352.44 |
Foreign institutional investors (FIIs) have significantly reduced their holdings, pulling out a staggering ₹22,858 crore in just the first six sessions of May. This massive sell-off is partly triggered by the attractive yields in the US bond market, drawing global capital away from emerging markets like India. On the other hand, domestic institutional investors (DIIs) have been net buyers, investing around ₹16,700.19 crore, though their efforts have been insufficient to counterbalance the outflows.
The technical charts for the Nifty Futures May contract reveal compelling details:
- Extreme Indicator Levels: On the hourly timeframe, the Nifty has touched the -3 standard deviation (SD) levels, a rare event indicating extreme oversold conditions. Such levels typically precede a reversal or significant bounce back in prices.
- Support Zones: Despite the sell-off, there’s a stable put writing observed around the 22000 mark, establishing a strong support zone between 21850 and 21900 for the Nifty spot. The attached chart on monthly open interest illustrates significant put option writing at the 22000 levels, reinforcing this support zone.
Nifty Options – May Monthly Open Interest Charts
Nifty Futures Market Profile Charts
Market Profile Charts shows that short term dominant sellers sold along with FII around the half back levels and around Wednesday’s low levels. Which are the short term market memory points and short term potential target destinations.
For traders, these insights are crucial for formulating strategies. Knowing that dominant sellers are active at specific memory points allows for strategic positioning, either by aligning with the dominant market force or preparing for a potential reversal if counter signals emerge.
Rise in Volatility Index Ahead of June 4 Election Results
Volatility and Opportunities
The rise in the India VIX, illustrated by the recent uptick in the index, correlates with the overarching anxiety surrounding the election outcomes. However, this volatility is not just a sign of risk but also an opportunity. The extreme readings on technical indicators such as the -3 SD level provide potential entry points for traders who specialize in contrarian setups, expecting the market to revert to mean levels.
Global Economic Influence
The hawkish stance of the US Federal Reserve, holding interest rates at a 23-year high of between 5.25% and 5.50%, has profound implications for global markets, including India. This policy is designed to cool off the US economy and control inflation, indirectly affecting emerging markets as investors seek higher yields in US treasuries.
Market Sentiment and Future Outlook
Market sentiment, as influenced by the ongoing political events and economic indicators, is notably bearish in the short term. However, the stability in put writing suggests a consolidation phase might be near, with potential short-term targets for the Nifty Futures lying at 22250 and 22500 levels.
As the election date draws closer, the interplay between FII selling and DII buying will be crucial in shaping the market dynamics. Investors are advised to keep a close eye on the VIX and liquidity flows from institutional players. The post-election period could witness a significant market recovery as clarity emerges and investor confidence is restored.
while the Nifty Futures May contract shows signs of extreme exhaustion, savvy investors and traders can find opportunities amidst the volatility. Careful analysis and strategic positioning will be key in navigating the choppy waters of the election season markets.
