Nifty 50 (22,929) and Nifty Bank (49,099) depreciated 2.7 per cent and 2.1 per cent respectively. The futures and options (F&O) data of both indices show bearish indications.
Nifty 50
Nifty futures (February) (22,972) lost 2.7 per cent last week. As the contract dropped, the cumulative Open Interest (OI) of Nifty futures went up by 8 per cent to 194 lakh contracts on Friday. This shows fresh short build-up.
The bearishness is reinforced by the Put Call Ratio (PCR) of options. For weekly and monthly expiry, the ratio stood at 0.6 and 0.8 respectively on Friday. Since participants have sold more calls compared to puts, PCR is less than 1. Traders sell calls when their expectation is bearish.
While the F&O numbers show a clear bearish tilt, the chart of Nifty futures show that the support at 22,940 stays valid. If the contract breaches this level, it can decline to 22,800 and then possibly to 22,400.
In case Nifty futures recover from the current level, it can face resistance at 23,250 and 23,400. That said, for the outlook to become positive, the contract should surpass 23,600. Resistance above this level is at 23,840.
Strategy: Stay out. Short Nifty futures if it slips below the support at 22,940. Place stop-loss at 23,250. When the contract falls to 22,700, revise the stop-loss to 23,000. Book profits at 22,400.
Instead of selling futures one can buy a put option. We suggest going long on 23000-put of February expiry at the prevailing price when Nifty futures breaks below 22,940. By then, the premium of the option could be around ₹300. Target and stop-loss can be ₹450 and ₹220 respectively. Post initiating this position, revise the stop-loss to ₹300 when the premium goes up to ₹400.
Nifty Bank
Nifty Bank futures (February) (49,288) recorded a loss of 2.1 per cent last week. Alongside was an increase in cumulative OI by 30 per cent to nearly 41 lakh contracts. So, like in Nifty futures, Nifty Bank futures witnessed a short build-up.
The PCR of February options stood at nearly 0.7, indicating considerably more selling of calls than puts, a bearish indication.
Even though not a textbook definition of double bottom chart set-up, Nifty Bank futures had confirmed this pattern in early February, sending out a potential bullish trend reversal signal. But it failed to extend the rally and has now dropped below the neckline (50,000).
However, it managed to close above a support between 49,000 and 49,200. So, it is imperative to watch the reaction of Bank Nifty futures to this support band.
If there is a recovery, which can lift the contract above 50,000, we might see an upswing to 51,500 in the short term. On the other hand, if it falls below 49,000, it can find support at 48,500. But a breach of this level can trigger another leg of downtrend, potentially to 47,000.
Strategy: At the current juncture, we see some uncertainty with respect to the trend. Traders can stay out and can initiate trade based on which of the two keys levels i.e., 48,500 or 50,000 is breached first.
What’s the trend?
Short build-up on futures of both index
PCR of index options show bearish bias
Go short if nearest support is breached