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Nifty 50 (24,304), the benchmark index, gained 0.5 per cent last week whereas Bank Nifty (51,674) appreciated 1.7 per cent. That said, the chart of both indices exhibit uncertainty about the direction of next trend. Here, we analyse the futures and options (F&O) data to find what current positioning tells us.
Nifty 50
Nifty futures (November) (24,384) posted a marginal gain of 0.2 per cent over the past week. The cumulative Open Interest (OI) of Nifty futures decreased considerably: it fell from 158.6 lakh contracts on October 25 to 117.1 lakh contracts on November 1. A price rally with a drop in OI shows short covering.
The Put Call Ratio (PCR) of the nearest weekly options is at 0.8, denoting relatively higher number of call option selling compared to puts. Participants sell calls when their outlook is bearish. But the PCR of monthly expiry is at 1.3, a bullish sign. So, Nifty futures might start recovering without much of a fall from the current level.
The chart of Nifty futures is bearish. But there is a support at 24,100 which can arrest the decline. This does not mean the contract can recover as the broader bias is still bearish.
Given the prevailing conditions, only a rally past 25,000 can lead to a sustainable upswing in Nifty futures. If that occurs, the price can touch 26,000. On the other hand, if Nifty futures slip below 24,100, we will most likely witness another leg of downtrend, potentially dragging it to 23,000.
Strategy: Stay on the sidelines. Short November Nifty futures (24,384) if it breaks the support at 24,100. Place stop-loss at 24,350. When the contract slips to 23,500, revise the stop-loss to 23,800. Exit at 23,200.
Alternatively, traders can buy November expiry 24,000-put option when the futures break below 24,100. Liquidate this trade at the prevailing option price when futures drop to 23,200.
Bank Nifty
Bank Nifty futures (November) (51,928) appreciated 1.5 per cent last week. As it happened, the cumulative OI of Bank Nifty futures declined: it fell from 35.5 lakh contracts on October 25 to 28.7 lakh contracts on November 1. This is an indication of short covering.
However, the contract failed to rally past the crucial resistance at 52,800. Until this level holds, the bears will have an edge over the bulls. But also note that the support at 51,000 has been holding well since past three weeks. This opens the possibility of Bank Nifty futures entering a consolidation phase.
If the November contract breaks out of 52,800, it can embark on a rally to 54,800. The price region between 54,800 and 55,000 is a strong supply zone. But if the contract falls from the current level and breaches the base at 51,000, the bears will gain more traction. Consequently, the price can drop to 49,500. Subsequent support is at 48,500.
Strategy: Go short on Bank Nifty November futures only if it breaches its nearest support at 51,000. Place stop-loss at 52,000. When the contract slips to 49,500, revise the stop-loss to 50,750. Book profits at 48,500.
Instead of futures, one can buy November series 51,000-put when the futures breach the support at 51,000. Exit at the prevailing price when futures decline to 48,500.
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