Nifty 50 (22,531) depreciated 1.9 per cent, whereas Bank Nifty (48,984) ended flat last week. Here is an analysis of the futures and options (F&O) data of both indices along with trade recommendations.
Nifty 50
Nifty futures (June contract) (22,701) opened on a positive note and hit a high of 23,271.25 on Monday. However, the tide turned quickly in favour of bears leading to the contract falling through the rest of the week and losing 1.8 per cent.
As the price of futures declined, the cumulative Open Interest (OI) dropped – it fell to 157.7 lakh contracts on May 31 versus 174.7 lakh contracts on May 24. A simultaneous fall in price and OI means unwinding of long positions. Nevertheless, this is not a bearish signal per se, as there is a key support ahead for Nifty futures.
The chart shows that the 20-day moving average support lies at 22,650. The price band of 22,600-22,650 is a support. If there is a rebound from the current level, which we expect to happen, Nifty futures can rally to 23,000 and possibly extend to 23,250.
On the other hand, if the contract slips below the support at 22,600, the downtrend can extend to 22,400 or even to 22,180.
With respect to options, there are no consistent cues as the Put Call Ratio (PCR) of weekly and monthly expiry options stood at 0.8 and 1.2 respectively. A ratio less than 1 shows more call option selling, a bearish sign, whereas a ratio greater than 1 means more put option selling, a bullish sign.
Nevertheless, going by the chart, the broader trend is up and the likelihood of a recovery from the current level is high.
Strategy: Last week, we suggested buying Nifty June futures if the price dips to 22,800. Retain the trade with stop-loss at 22,550. When the contract moves past 23,000, raise the stop-loss to 22,800. Tighten the stop-loss further to 22,900 when the price hits 23,100. Book profits at 23,250.
As an alternative, we recommended buying at-the-money June monthly call option. Traders who opted for this can hold the option. Exit this contract at the prevailing rate when Nifty futures reaches 23,250.
Bank Nifty
Bank Nifty futures (June expiry) (49,352) outperformed Nifty futures as it ended last week on a flat note, thanks to the recovery on Friday.
But for Bank Nifty futures, too, the cumulative OI decreased – it came down to 24.3 lakh contracts on May 31 as against 30.6 lakh contracts on May 24. Since there has not been much of a change in price on a weekly basis, the change in OI does not hold much of significance.
Coming to options, the PCR of weekly and monthly contracts were at 0.8 and 1 respectively. This shows a slightly bearish tilt for this week.
However, the chart shows that Bank Nifty futures found support at 48,900 and rebounded. Also, the broader trend has also been bullish. Therefore, the probability of an upswing from here is high.
Although there is a resistance ahead at 49,400, we expect Bank Nifty futures to surpass this level and move towards 50,000. A breakout of this can lift the contract further to 50,500.
On the other hand, if the contract falls from the current level and breaks below the support at 48,900, it can decline to 48,600 where a trendline support is likely to meet Bank Nifty futures. Subsequent support levels are at 48,000 and 47,600.
Strategy: We advised going long on Bank Nifty June futures at 49,340. Hold on to this position. Add longs in case the price dips to 48,700. Stop-loss can be at 47,800. When the contract rallies above 49,800, tighten the stop-loss to 48,700. When it reaches 50,200, raise the stop-loss to 49,000. Book profits at 50,400.
Traders who bought 49000-strike call option (we recommended June monthly series) as a alternative for futures, too, can retain the trade. Accumulate when Bank Nifty futures soften to 48,700. Liquidate the option at the going price when Bank Nifty futures hits 50,400.
Participants should stick to the stop-loss levels strictly. Since the election results will be out this week, we might see higher volatility in the market through next week. Risk-averse traders can stay away from taking trades for the next few days.