Nifty shorts hit a six-month high in worst September F&O series in 25 years. Time for extra caution?

Foreign investors have turned significantly more defensive on Indian equities, increasing their bearish bets on the index during the September series. FII index shorts rose 41.9% to 2.95 lakh contracts from 2.08 lakh in August, the highest level in the tracked series. Index longs, meanwhile, increased by a much smaller 16.9% to 27,879 contracts.

As a result, FIIs' net index short position widened to 2.67 lakh contracts from 1.84 lakh at the start of the September series. The FII Index Futures Long ratio stood at 0.09 relative to the previous expiry. FIIs added 4,022 index long positions during the series, compared with 87,102 short positions. The positioning indicates that foreign investors have been reluctant to rebuild meaningful long exposure to the index amid continued market volatility, domestic brokerage Axis Direct said.

The shift in positioning was accompanied by a reversal in institutional flows. After two consecutive months of buying, FIIs recorded net outflows of $3 billion during the series. The bearish positioning, however, was more pronounced at the index level than in individual stocks.


In stock futures, FIIs remained net long, although their exposure declined. Their net long position stood at $3,645 million, compared with $4,546 million at the previous expiry. FII stock-futures longs declined 2.5%, while shorts increased 0.7%, leaving the net long position intact but marginally lower. Nuvama Institutional Equities said FIIs' net longs in stock futures stood at 4,96,000 contracts, compared with 6,01,000 contracts at the start of the September series.

Mayhem in September

The heavy selling made September the worst Nifty derivatives series in a quarter century, with the benchmark falling 6.7% and slipping into a key long-term support zone. The decline was last seen in September 2001, when Nifty fell 6.5%.

Also read: Festive crash ahead? Nifty bulls face 4 bearish signs as October F&O series begins

Nifty lost more than 1,400 points during the September series as elevated crude prices, a weak rupee, hardening bond yields and persistent foreign selling kept risk appetite under pressure.

The weakness has also stretched beyond the monthly expiry. Nifty has ended seven consecutive weeks in the red and will post an eighth straight weekly decline if bulls fail to engineer a recovery this week. That would mark its longest losing streak since 2001, when the index fell for nine consecutive weeks.

Before this week, Nifty had recorded seven or more consecutive weekly losses only four times in the past 25 years, in 2020, 2008 and twice in 2001.

Nifty October outlook

Nifty is trading below both its 50-day and 200-day moving averages, with both averages sloping downward. Systematix has identified 21,900-22,200 as the key support zone, while a sustained move above 22,700 would be important for a change in the current technical setup.

Momentum indicators have not yet reached oversold territory, leaving room for further weakness before a technical base can form.

The sharp decline has also brought Nifty to its 200-week moving average, a long-term support level that has not been tested since the Covid crash. Rupak De, senior technical analyst at LKP Securities, said the index had slipped to its 200-week moving average, currently placed at 22,600.

“A decisive break below this level could trigger a sharper correction in the market. However, if Nifty manages to hold above 22,600, a similar recovery towards the higher end could be expected,” De said. “Therefore, 22,600 will remain a crucial support level for Nifty. On the higher end, immediate resistance is placed at 22,800.”

ICICI Securities placed the 200-week exponential moving average at about 22,400 and said the level coincided with the 80% Fibonacci retracement of the preceding up move and a rising trendline support, creating a strong support confluence.

The brokerage said 82% of Nifty 500 stocks were trading below their 50-day simple moving averages, pointing to a significant deterioration in market breadth. It added that Nifty’s daily RSI, at about 27, was showing positive divergence, while the weekly stochastic oscillator was in an oversold zone. These conditions could support an intermediate technical pullback.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.