InvestorQ : What is your view on the Nifty for 20 January? What explains such a sharp bounce in the Nifty on Tuesday?
Neelam Naik made post

What is your view on the Nifty for 20 January? What explains such a sharp bounce in the Nifty on Tuesday?

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diksha shah answered.
2 months ago
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You are right it was absolutely surprising and gratifying to see the Nifty and Sensex bouncing back so hard. In fact, after the two day carnage in markets it was a big bounce as both the indices recouped over 80% of the correction of the last two days. The sharp bounce in the two indices was accompanied by a sharp fall in the VIX by 6%, indicating lower fear factor.

Global flow figures have been relatively flat to mildly positive through the last 3 days of correction and bounce cycle. This is indicative of the fact that most of the action was due to short covering in the futures and options segment and traders being unwilling to carry any short position in the market ahead of crucial results.

As I stated earlier, the foreign portfolio investors or the FPIs were net buyers to the tune of Rs.258 crore while DFIs sold Rs.199 crore on Tuesday. With FPIs continuing to be tepid through the crash and bounce, it does look like decisive FPI action is yet to come in a big way. For now the action is more focused on the traders.

Global cues are relatively mixed and that is likely to decide the undertone for Wednesday trading. On Tuesday, the biggest positive action was seen in the tech-laden NASDAQ. The Dow was up around 35bps while Europe was down about marginally. NASDAQ was up nearly 1.6% as tech stocks saw sharp spurt in buying. SGX Nifty is lower in early trades.

In a nutshell, that was short covering that actually led to closure of short positions in the futures market fuelling the bounce in the markets on Tuesday. Traders are just averse to stick to shorts in a market flush with liquidity. This is because most large companies have beaten expectations on quarterly results. It is not clear if the bounce sustains.
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