With shorts running for cover, banks could lead any rebound

Bank Nifty, banks, Nifty, short positions, SBI

Mumbai: Banking stocks are likely to lead if the market rebound continues as traders will be forced to cover their accumulated bearish derivative bets.

Some of the short positions were squared off in Wednesday’s session, helping the Bank Nifty gain nearly 2% to end at 36,364.90 while the benchmark Nifty advance 1.1% to 17,166.90. IndusInd Bank rose 5.7%, Axis gained 3.5% and SBI moved up 3.1% on Wednesday.

Traders added short positions, or bearish bets, on banks in the wake of the recent selloff in the broader market. The Bank Nifty has lagged the benchmark over the last few weeks, falling 15% from its all-time highs compared to a nearly 8% fall in the broader Nifty. The banking index had hit a record high of 41,829.60 on October 25 this year.

Bank Nifty, banks, Nifty, short positions, SBI

HDFC Bank’s December futures is seeing the highest open interest or outstanding positions in two years.

“The first sector to see short covering on a market rebound would be banks. The sector is oversold and FIIs have been the main sellers,” said Rajesh Palviya, head-technicals and derivatives at Axis Securities.

“Call writers were on a backfoot on Wednesday and we have seen significant call unwinding of 35,900 to 36,200 in weekly options. If Bank Nifty goes above 36,500, it can head towards 37,000 in a short time as short covering has begun.” Call writers or sellers bet on limited upsides in an index or a stock.

Derivative analysts said PSU banks are likely to see higher buying interests as their shares held on to the short-term moving averages even in the recent selloff. Palviya of Axis Securities is bullish on Canara Bank. Canara Bank has a very strong price structure and can go to ₹220-₹235 levels if the pullback continues, said Palviya.

Within private banks, Axis Bank and ICICI Bank are favourites for short-term trades.

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