Nifty 50 (24,368) and Bank Nifty (50,485) lost 1.4 per cent and 1.7 per cent respectively over the last week. While the long-term outlook is still positive, the near-term trend remains uncertain. Here’s an analysis of the futures and options data of both indices.

Nifty 50

Nifty futures (August) (24,402) witnessed the exit of some long positions as the cumulative Open Interest (OI) declined as the price dropped. It posted a weekly loss of 1.4 per cent. But this by itself is not a bearish signal, as the contract has support ahead.

Although Nifty futures saw a considerable decline on Monday, for the rest of the week, it managed to trade within a band. It was oscillating between 24,000 and 24,400. At the moment, bulls are defending the support at 24,000 well.

However, for a rally to occur, the contract should decisively break out of 24,450. In such a case, it can rise to 25,030. The upswing may extend to 25,200. On the other hand, if 24,000 is breached, we will most likely see another leg of downtrend. Supports below 24,000 are at 23,380 and 23,000.

The Put Call Ratio (PCR) of the weekly options stood at 0.8 on Friday, indicating a relatively greater number of call option selling, a bearish sign. But the PCR of August monthly options was at 1.4, a positive indication. So, even though there might be some weakness this week, Nifty futures might recover towards the end of this month.

Strategy: The risk-reward ratio is unfavourable for both long and short positions at the current market price. Buy Nifty futures with a stop-loss at 24,200 if it surpasses 24,450. Target can be 25,000. Alternatively, you can buy an at-the-money (ATM) August monthly call option.

Instead of rising past 24,450, if Nifty futures fall and break below 24,000, consider going short. Target and stop-loss can be at 23,050 and 24,420 respectively. After initiating the trade, when the price falls to 23,500, revise the stop-loss to 23,900. Tighten the stop-loss further to 23,550 when the contract touches 23,350. Rather than shorting futures, you can consider buying an ATM monthly put option for lower margin obligation.

Bank Nifty

Bank Nifty futures (August) (50,574) dropped 1.7 per cent last week. As it declined, the cumulative OI of futures increased, indicating fresh short build-up. The PCR of weekly and monthly options stood at 0.9, showing a comparatively greater number of call option selling, a bearish sign.

The chart shows the contract started to move sideways after opening the week on a weak foot.

The band within which the contract is now trading is 49,800-50,900. So, the next leg of trend depends on which direction Bank Nifty futures move out of the above-mentioned range.

A breakout of 50,900 can trigger a rally to 52,200, its nearest resistance. Subsequent barrier is at 53,400. On the other hand, if the contract falls below the support at 49,800, the downswing can extend to 47,500, a good base.

Strategy: As the contract is stuck in a range, do not initiate fresh positions at the current level.

Consider going long if Bank Nifty futures move past the hurdle at 50,900. Keep a stop-loss at 49,600. When the contract rises to 52,200, modify the stop-loss to 51,800. Book profits at 53,200. Alternatively, one can buy an ATM call option (monthly expiry).

But if Bank Nifty futures break below 49,800, go short with a stop-loss at 51,000. When the contract declines to 48,500, tighten the stop-loss to 50,000. Liquidate the shorts at 47,500. Instead of futures short, traders can buy a monthly ATM put option.

Related Topics