FIIs unwind PCR and the BSE Industrials

FIIs have been unwinding their longs in the index futures segment again, and positions are now nearly back to zero. We have seen markets bottom near term from the near zero positions point recently but in 2012 after a negative divergence the positions went negative and short nifty. So this level has to be closely watched.

I noted in the LSR that Volume PCR rises during market declines as markets panic and people buy more protection, so despite the high OI in Puts there is no volume. Even in recent days we have two readings of 0.39 near the lower end of the range. Lower highs in the VPCR at market lows shows lower and lower levels of fear. So on this measure we are far from any selling climax but quite the contrary. I expect this narrow wedging pattern will break on the upside during the next market decline as volatility rises and risk perceptions go up again. The VPCR is a medium term cycle indicator. Readings above 0.7 would mark nearing a medium term bottom.

 

The Open Interest Put/Call ratio on the other hand is a directional indicator and in the short term moves up and down with the prices. So after the negative divergence with NIfty the nifty did roll over. On the 2 previous tops in Aug and Sept similar readings caused a top but the market bottomed before the indicator could go to the lower red line and be oversold. This time if we finally have a medium term top in place it should do so. As long as the PCR is trending lower it indicates a falling trend in the market

Finally the most interesting of indices are the BSE new indices. At first I did not think much of them but as I do now they have good patterns and are more broad based as well in some cases. So yesterday I discussed the BSE Finance index that has a 100 financials in it and not dominated by a few. The weekly momentum of the Finance index has been in sell mode for weeks and not whipsawed like the others. So here is the BSE Industrials index, and it has a good mix of large cap and mid cap stocks. 225 stocks in total it is quite broad based. So what do I like about it? That the chart has perfect touch points on the monthly chart for an ending pattern, and unlike the Nifty 500 the entire pattern is overlapped. Lastly wave E of the wedge is itself an ending diagonal as shown by blue lines. This index is convincing that something long term ended here.

FIIs What are they upto in India?

FIIs have been consistent sellers in the market and I am not talking only about the Cash market where they have sold net for Sept so far after a similar trend in August. The Index futures OI that I plot for FIIs [blue line] and shows a similar trend for much longer. FIIs were Max Long in Index futures a year ago. This year they did not add up that much and since June they are in exit mode.

Now positions came very close to zero in August and the markets bounced. Near Zero readings have caused market bottoms before, except in larger bearish trends when the Positions declined below the lower red line and FIIs were short in index futures. So either that is likely or FIIs will be pushed into buying again from here which could propel the market up like crazy. In that sense this is an inflection point.

IF FIIs keep selling then they will be going to the other side of the trade from Long to Short else they should start buying back. I have drawn a falling trendline from the June high and as long as the trend remains below it, I should think it is down. Starting Sept the blue line is falling again and not rising despite a rising market so they are not yet buying meaningfully.

 

The second chart which shows the extreme in Options OI in client positions as a % of the total. Look at the Red circles around all the tops since 2015. We are in the red zone again. What I do not know is whether large part of the decline will come this month or the next because of all the Put writing that has been done. But the upside should be limited on this indicator.

 

Adam Smith Associates offers trade & commodity finance related services & solutions to its domestic and international clients. Views expressed in this article are purely of the author – Mr Rohit Srivastava – a leading technical analyst. Visit www.adamsmith.tv for services offered by Adam Smith Associates Pvt Ltd