Nifty 50 (25,015) and Bank Nifty (51,462) have depreciated 4.4 per cent each last week. Both indices faced sell-off through the week and the derivatives data show bearish inclination. Below is an analysis.
Nifty 50
Nifty futures (October) (25,174) slumped 4.4 per cent last week. As it fell, the cumulative Open Interest (OI) also declined. A simultaneous decrease in both price and OI indicates unwinding of long positions.
The Put Call Ratio (PCR) of weekly options stood at 0.4 on Friday. This shows that the number of call options sold are more than double that of put options. Traders sell calls when they are bearish. So, the expectation for this week is bearish.
The chart shows that Nifty futures fell below an important support at 25,500. That said, from the current level of 25,174, there is an immediate support at 25,000. If this level is breached, the contract can decline to 24,350.
On the other hand, if Nifty futures recover from here, it will face roadblock at 25,500. Only a breakout of this level can turn the outlook bullish. If the contract surpasses 25,500 it can rise to 26,000.
Strategy: Sell Nifty futures if it breaks below the support at 25,000. Target and stop-loss can be 24,400 and 25,300 respectively. After initiating the trade, when the price slips below 24,700, revise the stop-loss to 25,000.
Alternatively, one can buy an at-the-money monthly put option when Nifty futures breach the support at 25,000. Exit the option at the prevailing price when Nifty futures drop to 24,400.
Bank Nifty
Bank Nifty futures (October) (51,871) lost 4.3 per cent last week. But unlike in Nifty futures, the cumulative OI of Bank Nifty futures increased. An increase in OI accompanied by a price drop suggests fresh short build-up.
The bearish bias is supported by options positioning too. The PCR of weekly and monthly options are 0.5 and 0.9 respectively. A ratio less than 1 shows greater number of call option selling compared to puts.
The contract invalidated key supports at 53,000 and 52,200 last week. But Bank Nifty futures has a trendline support coming up at 51,500. A breach of this can drag the price to 50,500.
Nevertheless, if Bank Nifty futures rallies from the current level, it can face resistance at 53,000. Only a move above this level can turn the short-term trend positive. Nearest notable barrier above 53,000 is at 54,500.
Strategy: Although the price action shows a clear bearish bias, Bank Nifty futures has supports ahead. On the other hand, there is a strong resistance on the upside too. Either way, the risk-reward ratio for both long and short positions at the current level is not very encouraging. Hence, we suggest staying out.
Yet, traders with high-risk appetite can short Bank Nifty futures with stop-loss at 52,000 if it falls below 51,500. Exit at Rs 50,500.
Note that, despite the bearishness exhibited by both Nifty futures and Bank Nifty futures, the broader uptrend in the underlying indices remain intact. So, traders who short the contracts are recommended to strictly adhere to the target and stop-loss levels.
Long unwinding in Nifty futures
Short build-up in Bank Nifty futures
Options on both indices show bearish bias
