Short-covering may push Nifty to 16800-17000 in coming weeks, downside limited; RIL, HDFC Bank shares may gain

NSE Nifty 50 may head towards 16800-17000 points in the coming weeks, helped by short covering in the futures and options space, said analysts at ICICI Direct in a note. For the May F&O series, aggressive shorts have been seen. Short positioning is the highest since 2018. “We believe short-covering play should take the index towards 16800-17000 in coming weeks. From current levels, we advise to focus on stocks where short positions are higher and there is a probability of short covering in coming weeks,” the note said. Possibility of downside is deemed to be limited. 

Net short exposure (index future) above 1 lakh contracts near the bottoms has resulted in meaningful short covering in the past and if that is any indication, the story should be the same now, the note said “We expect similar action this time as there short exposure was above 1.22 lakh contracts. In the last few sessions, the early trend of short covering was observed,” it added. 

700-800 point upmove on cards

The short positions have been trimmed already in recent days by Foreign Institutional Investors (FII). Analysts said that FII short exposure has moved to 77,000 contracts, which is a positive development. May series has witnessed short exposure, which prompted long/short ratio to lows of 0.20. Analysts further said that as the quantum of FII selling reduces in the cash segment, sharp up-sides of 700-800 points can be seen in the Nifty index. FIIs have pulled out more than Rs 37,000 crore so far in the month of May, NSDL data showed.

“At the inception of the May series, the major Put base was placed at 17000 and 16800 strikes, below which sharp declines were observed. In case of recovery, we believe if the Nifty moves above the May VWAP of 16350, then continued up move towards 16800/17000 levels is likely to be seen,” ICICI Direct said. 

Where is short-covering expected?

ICICI Direct noted that sectors like BFSI, technology, realty and cement saw aggressive short additions. “Since the Nifty violated, 17000 levels, no major short Put OI was formed. However, in recent days the quantum of Put writing has almost doubled. We feel stocks where still good amount of shorts are open can be looked upon as short-covering candidates,” they added. Stock such as HDFC Bank, Axis Bank, Titan Company Ltd, Concor, Hindalco, Bajaj Finserv, Reliance Industries, and DLF are some short-covering candidates listed by ICICI Direct. “We feel a short-covering move of 8- 10% can be expected once the stock manages to close above their immediate Call bases,” analysts said.