Nifty 50 (24,181) and Bank Nifty (50,787) depreciated 2.7 per cent and 2.5 per cent last week. The former posted a weekly loss for the fourth time in a row, indicating strong selling pressure. Here, we analyse derivatives data of both indices.
Nifty 50
Nifty futures (October) (24,193) declined 3.6 per cent last week. As the price dropped, the cumulative Open Interest (OI) of Nifty futures increased marginally – it rose to 158.6 lakh contracts on October 25 versus 157.8 lakh contracts on October 18. A fall in price along with an increase in OI denoted short build-up.
Supporting the same, the Put Call Ratio (PCR) of Nifty October expiry options stood at 0.75 on Friday. A ratio less than 1 means greater number of call option selling (writing). Traders sell calls when they are bearish.
Although the futures and options (F&O) data gives a bearish bias, the chart shows that Nifty futures has a support at 24,000. While there are no signs of a bullish reversal now, the support might lead to a consolidation phase.
The nearest resistance is at 24,650. Nevertheless, Nifty futures ought to break out of 25,000 in order to turn the trend bullish. Such a move can lift the contract to 26,000 quickly. On the other hand, if the price slips below 24,000, the next stop for Nifty futures is likely to be at 23,000.
Strategy: Stay out for now. Since the October contracts are nearing expiry, for fresh positions, traders may consider November series. Short November Nifty futures (24,333) if it slips below 24,100. Stop-loss can be at 24,350. When the contract slips to 23,800, revise the stop-loss to 24,050. Exit at 23,500.
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 23,500.
Bank Nifty
Bank Nifty futures (October) (50,846) was down 3.3 per cent last week. As it occurred, the cumulative OI increased i.e., it went up to 35.5 lakh contracts on October 25 as against 31.5 lakh contracts on October 18. This indicates short build-up.
In addition, the PCR of weekly options stood at 0.6 on Friday, which corroborates the bearish inclination. A ratio less than 1 shows relatively a greater number of call writing.
While the above factors show a clear bearish bias, the price action shows that Bank Nifty futures managed to close the week above a key support at 50,500. While this is not a signal of the trend turning up, the support might arrest the downtrend.
In case the bears regain traction and drag the contract below 50,500, it can open the door for another leg of a fall, which can potentially take Bank Nifty futures to 49,000. A breach of 49,000 can lead to a decline to 48,000.
On the other hand, if there is a recovery on the back of the support at 50,500, it can face a barrier at 51,300. That said, Bank Nifty futures ought to surpass the resistance at 52,500 to turn the trend bullish. In such a scenario, the contract can rise to 55,000.
Strategy: Sell Bank Nifty November futures only if it breaks below its nearest support at 50,750. 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 50,800-put when the futures breach the support at 50,750. Exit at the prevailing price when futures decline to 48,500.
