FII and retail positioning ahead of election results look scary, warns Rupak De of LKP Securities

Ahead of the much-anticipated outcome of the Lok Sabha election results, the FII long-short ratio stands at a multi-year high of 87% shorts in the index futures, coupled with heavy selling in the cash market. On the other hand, retail investors are holding highly leveraged long positions.

“Both these factors are a bit scary. That means a slightly favourable election outcome might lead to a heavy unwinding of longs on margin calls, and the market might slip towards 22,000-21,500. On the other hand, a better-than-expected outcome might lead FIIs to go for aggressive short covering, which might take the Nifty to 23,000-23,500,” says Rupak De, Senior Technical Analyst at LKP Securities.

Edited excerpts from a chat:

Nifty rollovers increased to 72% in the May series and on Friday the short positions exceeded 3 lakh contracts. What is the kind of inference that you can draw from the rollover data?

The rollover into the June series was higher at 72% compared to the previous three-month average of 69%, with the Nifty closing the expiry more or less flat. However, the FII long-short ratio stands at a multi-year high of 87% shorts in the index futures, coupled with heavy selling in the cash market. On the other hand, retail investors are holding highly leveraged long positions. Both these factors are a bit scary. That means a slightly favourable election outcome might lead to a heavy unwinding of longs on margin calls, and the market might slip towards 22,000-21,500. On the other hand, a better-than-expected outcome might lead FIIs to go for aggressive short covering, which might take the Nifty to 23,000-23,500.

Do you think ‘Abki baar 24,000’ is possible this week if BJP wins over 320 seats?

A favorable outcome for BJP is likely to take the index on a wild ride towards 23,500. However, at this juncture, 24,000 appears slightly unlikely, at least in the 4-5 trading sessions.

How should F&O traders position themselves for Monday’s and Tuesday’s trade as exit polls and actual results will heavily influence the market on both days?

Given the high volatility, which has already led to a significant rise in option premiums, a long-only option strategy might not be advisable. Instead, a spread strategy, where the maximum risk is limited and offers a favorable risk-reward ratio, could prove to be beneficial around the pivotal event. Open-ended option short strategies like short straddles or short strangles should be avoided.

What does the chart look like for the PSU index? Do you see a high risk-high reward trade in PSU stocks ahead of the election outcome?

The charts of the PSU index have formed a bearish pattern on the weekly timeframe, indicating near-term weakness. However, the long-term chart remains favorable and offers a great opportunity for buy-on-dips investors. Therefore, investors might remain watchful in this space and add on dips. The defense, infrastructure, and housing PSUs continue to be good buy-on-dips opportunities.

Give us your top ideas for the election week

Stock Picks:
1) Buy BHEL 300 TGT 320 SL 290
RATIONALE: The stock has experienced a consolidation breakout on the daily chart, indicating a potential shift in momentum. Additionally, it is currently sustaining above the critical moving average, the 21 EMA, suggesting bullish sentiment. Moreover, the Relative Strength Index (RSI) is on the verge of entering a bullish crossover, further supporting the outlook for upward movement. Based on the technical chart, the stock looks good to rally towards 320 in the short term, while support is placed at 290.

2) Buy IRCON 272 TGT 290 SL 262
RATIONALE: The stock has undergone consolidation following a rally on the daily chart, suggesting a period of price stabilization. It is currently maintaining above the critical moving average, the 21 EMA, indicating potential bullish sentiment. Moreover, on the hourly chart, the Relative Strength Index (RSI) has entered a bullish crossover, further supporting the possibility of upward movement in the short term. Based on the technical chart, the stock looks good to rally towards 290 in the short term, while support is placed at 262.

3) Buy GESHIP 1082 TGT 1170 SL 1039
RATIONALE: The stock has undergone a two to three-day consolidation period and has maintained its position above the critical moving average, confirming a bullish trend. Additionally, the daily Relative Strength Index (RSI) is showing a bullish crossover, indicating increasing momentum and potential for further upward movement. Based on the technical chart, the stock looks good to rally towards 1170 in the short term, while support is placed at 1039.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)