Why do Nifty and Bank Nifty respect Support and Resistance levels.
If the index is supposed to go up at particular support level then most of the stocks which are part of Nifty 50 should also go up. But this might not be the case many times.And similarly with resistance as well.
It all depends on which stock or sector within the index is contributing. Only one sector may increase and this can lead to the index increasing. Also the weightage of the stock in the index matters.
As @nithin has told previously in the below thread that since most of the activities happens in FnO, and while theoretically the underlying must drive the derivatives, in the real world trading its not the case.
So maybe traders would start selling Nifty Futures when it hits resistance (or vice versa go long when hits support?). Or maybe buying/shorting heavyweights like Reliance, HDFC etc…
Effects of FnO on underlying asset
Hi @uday2358 ,
First of all, you should be asking yourself what is the meaning of support and resistance. Markets are driven by market participants. The one with the larger size will move the markets in his/her direction. At that point, it does not matter if there is a 50dma, 100dma, 200dma, trendline, channel, fibonacci level, pivot etc etc. in its way. The only support and resistances occur at levels where the market participants are positioned which will be evident in the above average liquidity or activity. Therefore, whether a level is respected or not is entirely dependent on the positioning of the market participants.
I believe you mean the index derivative here because an index cannot go up without its constituents going up (dependent on how the index gets calculated). The index derivative can go up even without the index itself going up which is what is called the premium and there are several factors that could play a role on that pricing but suffice it to say that it is almost always dependent on the flows.
I have seen some fairly illiquid OTM Nifty options moving against the underlying dramatically purely driven by cash poured in. E.g :- The OTM call price moving up even when Nifty is moving down and vice versa.
But broadly the really liquid options move with the underlying, not 1:1 obviously but in the same direction.