FIIs ease their index future shorts. Will this extend Nifty’s uptrend?

While Nifty took 10 trading sessions to move from the lower to the middle Bollinger Band, it took just three sessions to travel the upper half. In doing so, Relative Strength Index (RSI) has swung higher from sub 25 to 70, pointing to the strength of the trend that unfolded in March. Incidentally, this surge also succeeded in seeing a 100 percent retracement of the fall from the February peak.

FII’s Index Future Longs’ swing from troughs to peaks have triggered predictable swings in Nifty in the past

FIIs who had continued to press on with record high shorts through October 2024 to March 2025 period, have begun to loosen their stranglehold. Since the shorts persisted with, even during a period of 1000 upswing during this bear phase, we looked back to see if there is historical evidence of any pattern. We found that since January 2022, there were 7 instances during the period where index future longs (IFL) fell below 20 percent. We dug a bit deeper and observed the following:

On 6 out of 7 such occasions, when index future longs’ proportion swung back above from sub 20 levels, IFL percentage went on to continue the rise to a minimum of 55 percent.
On an average, it took about 43 days to peak, with the lowest number of days recorded at 13 and the highest being 107 days during the bull phase between January and July 2023. At present, IFL has spent 61 trading sessions after dropping below 20, and crossed 30 on 21 March 2025. This signals continuation of rise in IFL.
Nifty recorded an average of 9.86 percent gain during this phase of uptrend. These numbers help us with a projection for Nifty, if index future led short covering succeeds in pushing Nifty higher.

IIFL proportion crossing back above 30, signalling potential uptrend in Nifty

Turtle Trades anticipated

While it is possible that expiry led dynamics muffle FII led short covering expectations, we believe that a break of 55 day high could trigger Turtle Trades as well. These are conventional approaches that rely on rule-based methods to enter and ride on trends before they extinguish. While the 23,800-24,200 is expected to be a supply zone, offering resistance to the ongoing uptrend, the break of 24,200 vicinity could mark a cross above 55 day high, for the first time since the downtrend began in September 2024. Such an event could ideally add more legs to the uptrend.

From where can the buying come from?

Clearly, the larger caps have led the surge, with more than 40 percent of small cap and microcap constituents yet to cross even the 50-day moving average (DMA), according to data taken as of 24 March 2025. This in turn suggests that we are yet to see froth, or the usual tendency for risk takers to chase lowly capped stocks. This preference for quality may be a sign that the ongoing upswing may sustain.