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Sentiment Update

25 Sep 2020 ‚óŹ 07:10 AM

A quick wrapup of sentiment after expiry is important because the last one week is where most of the selling happened and nifty lost more than 500 points. This has resulted in the capitulation of longs with the nifty open interest dropping to 84 lakh shares the lowest level historically. Thus if everyone has been forced to exit, there is nothing left to sell.
In the long short report, I discussed the OI PCR that had dropped to the lower end of the range even as the index it consolidated, it had just not slipped below the grey line at the bottom, and that has happened now. This is an oversold reading now similar to that seen in May and March.

The net call - put position in value terms Jaya rates from one extreme to the other. The red dotted lines show these extremes based on historical actions. In the recent three-year period market tops have occurred when readings reached the 2nd red line at the bottom, and similarly, market bottoms were reached at the 1st red line on the top. On Wednesday the net position of almost 28,000 crores is the highest since August 2019 and March 2020. It tends to reflect extreme bearish sentiment where option sellers are willing to sell a large number of call options given their confidence in the decline. Several near-term bottoms have occurred on this reading is seen below.

The 20-day advance-decline ratio has now fallen to the 2nd red line, getting more oversold. Clearly, the negative divergence at the top should not have been overlooked.

 

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