The markets traded strong throughout Wednesday on account of short covering in key index and mid cap stocks. The Sensex closed at 17,594, up 5.17 per cent, while Nifty closed at 5,229 up 6.73 per cent.
There was short covering in Nifty futures as the open interest declined sharply by 35.16 lakh shares to 275.4 lakh shares. Reliance Industries witnessed short covering of 3.21 lakh shares as the value of January futures contract up 8.17 per cent.
Short covering also took place in RNRL (futures up 22 per cent, OI down by 51.48 lakh shares), Reliance Energy (futures up 18.6 per cent, OI down by 57,750 shares) and NTPC (futures up 13.3 per cent, OI down by 25.11 lakh shares).
The recovery was, however, restricted to the large cap stocks. While the advance decline ratio was extremely positive for Sensex and other index-based stocks, it was negative for B1 and trade-to-trade group stocks at 2:8.
The markets are likely to consolidate at the current levels before a further upmove, according to Anand Kuchelan, derivative analyst at PINC research.
With Wednesday's recovery, the cost of carry for several large cap stocks moved from deep discount to a healthy premium. This would help the market to move up further and the Nifty should reach 5,500-5,600.
The markets continue to be in an oversold zone, as the Nifty PCR is 0.92. Derivatives trading was subdued, with the turnover declining from Rs 82,241 crore (Rs 822.41 billion) on January 21 to Rs 44,307 crore (Rs 443.07 billion) on January 22 and Rs 36,073 crore (Rs 360.73 billion) on Wednesday. Trading in index options was also lacklustre.
