India’s benchmark Nifty had been witnessing aggressive swings since August 5th 2019. In the last 4 trading sessions, the index has swung violently inside a range of 282 points between 10806 and 11088. The important question is why.
The Hammer Formation!
In order to understand the sharp swings in the past 4 sessions we shall combine the institutional traders and the chart pattern on the 5th of August. In the daily time frame, a hammer pattern was formed in Nifty on the 5th of August. The first question is, what did the hammer tell us? The hammer pattern was formed in Nifty as the index had registered a low of 10806 and closed at 10896 on the same day. It was an indication that the institutional traders were attempting to form a rock solid bottom. But the question is, how can we be sure?
The Institutional Ratios
For the confirmation of the pattern, we tracked the institutional position in the options market on the 5th of August. What we found was surprising; on the same day the market makers were building ratios in the option market during the second half. That meant, Nifty would slip into a range with an upside bias. The downside was capped. The hammer pattern was right in indicating a bottom.
Profit Booking In Ratio Post RBI Policy
The institutional traders have booked 30% of their total position in the ratio yesterday, and have netted 100% returns after it doubled in value, post the RBI policy. At close today, the institutions have booked another 40% of the total position at a return of 125%. Now they are left with 30% open positions only. Going forward, Nifty will form a trend only if the ratios are completely wrapped up. Else the index will continue to witness aggressive swings in the upcoming sessions.