BHEL Shares Rally on Short Covering Bets. What Next?

Bharat Heavy Electricals Limited (BHEL) is a prominent engineering and manufacturing company in India.

Established in 1964, BHEL has grown to become one of the largest power generation equipment manufacturers globally.

The company specializes in designing, manufacturing, and servicing a wide range of power plant equipment, including turbines, generators, boilers, and control systems.

The stock has been in focus lately, primarily due to the recent rally seen triggered by short covering.

Let's understand more about this.

Technical Analysis

On the daily chart of BHEL, a significant breakout occurred above the previous high at Rs 94, which was demarcated by a horizontal trendline.

This breakout signified a potential shift in the stock's trajectory.

Daily Chart

 

The rising Bollinger Bands also provided insights into the stock's price movement. The buy-on-dips strategy was validated as the stock consistently bounced off the middle and lower Bollinger Bands.

The recent reversal from the lower band indicated a strong support zone within the rising Bollinger Band, emphasizing its importance as a potential turning point.

Volume Analysis

The rally in BHEL was characterized by a substantial surge in trading volumes, making it a notable movement.

With the highest volumes recorded in a single day in 2023, this surge in activity supported the credibility of the price movement, indicating increased investor interest and participation in the stock.

RSI Analysis

The Relative Strength Index (RSI) played a pivotal role in confirming the bullish trend. The RSI, which took support at the median line of 50, indicated that the bulls were firmly in control of the trend.

It indicates that the stock had substantial room to grow before entering an overbought territory, strengthening the case for a sustained rally.

Derivatives Market Activity

In the derivatives market, a specific call option, the 100CE, exhibited significant activity. Call writers had established a resistance level of Rs 100.

However, the short-covering phenomenon led to a reversal in this scenario.

As the call writers unwound their positions, the Open Interest in the 100CE option dropped by approximately 20%, declining from around 1,419 contracts to about 1,130 contracts.

This reduction in Open Interest indicated that the call writers were covering their short positions, resulting in a bullish sentiment shift.

Impact on Stock Price

The short covering-induced shift in the derivatives market had a direct impact on the stock price.

The unwinding of short positions in the 100CE option contributed to a surge in the stock price.

This bullish momentum propelled the stock to hit its first upper circuit for the day, underlining the influence of derivatives market activity on the equity's performance.

Conclusion

In conclusion, the rally in BHEL, driven by short covering, was supported by a combination of technical and market factors.

The breakout above a key resistance level, the validation provided by Bollinger Bands and RSI, strong trading volumes, and the dynamics of the derivatives market collectively contributed to the bullish momentum.

The short covering, particularly evident in the decline of Open Interest in the 100CE call option, was a pivotal catalyst that triggered the stock's upward movement.

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