Nifty 50 (23,203) and Bank Nifty (48,541) slid 1 per cent and 0.4 per cent last week. Both indices marked a seven-month low (23,047 for Nifty 50 and 47,898 for Bank Nifty) last Monday before some recovery.

The futures and options (F&O) data of both indices indicate that further decline can occur. Below is an analysis.

Nifty 50

Nifty futures (January) (23,267) was down 1 per cent last week as fresh short arrived through the week. The increase in cumulative Open Interest (OI) by 14 per cent last week to nearly 180 lakh contracts denotes short build-up.

The Put Call Ratio (PCR) of weekly options stood at 0.80 as traders wrote (sold) comparatively higher number of call options than puts. Participants sell calls when they hold bearish view.

As per the chart too, there is no sign of a bullish trend reversal. While the intraweek price movement can be classified as range-bound, Nifty futures remain below some key resistance levels like 23,500 and 23,850. Probably a clear breach of 23,500 can give some breathing space for the bulls.

That said, Nifty futures is also trading near the support band of 22,900-23,000. Once the contract falls to this region, the probability of a bullish reversal will go up considerably as this is a strong base. 

But if Nifty futures slip below 22,900, it can extend the decline to 22,500 or even to 22,000 quickly.

Strategy: Last week, we suggested selling at 23,501 for a target of 23,000. But Nifty futures opened with a gap-down at 23,400 on Monday and marked a low of 23,162 before a recovery. Traders who short the contract can retain the position for a target of 23,000. But revise the stop-loss down from 23,925 to 23,550. 

As an alternative to futures short, we recommended buying 23500-put if the premium dips to ₹275 and ₹200. The option price dropped to ₹275 only on Thursday, made a low of ₹270 and has now recovered to ₹369.60. Retain this trade. However, going ahead, do not buy at ₹200. Also, revise the stop-loss from ₹125 to ₹175 and change the target from ₹580 to ₹500.

Bank Nifty

Bank Nifty futures (January) (48,686) posted a loss of 0.4 per cent last week. There was a marginal increase in the cumulative OI, denoting moderate short build-up. The PCR of options stood at nearly 0.5 per cent on Friday thereby indicating that traders have sold calls twice as much as puts, a bearish indication.

The weakness is also shown by the chart. Despite a recovery, Bank Nifty futures was unable to top the key 50,000-mark. As long as this barrier holds, the inclination will be bearish.

The price action shows that there is more room for a decline with the nearest notable support for Bank Nifty futures coming in only at 46,400-46,000 price band. To avoid this downswing, the contract should recover from the current level and get past 50,000 soon.

A decisive breakout of 51,000 can turn the short-term outlook positive. For the medium-term trend to become bullish, the contract should top 54,000. 

Strategy: Retain the Bank Nifty short that we suggested at 48,886 last week. Add short if the contract rises to 50,000. Maintain stop-loss at 51,250. When the contract touches 47,800, trail the stop-loss down to 49,800. Tighten the stop-loss further to 48,500 when the contract touches 46,900. Book profits at 46,400.

We suggested buying 50000-put if traders wanted to avoid futures. The average purchase price would be ₹1,175. The current premium of this option is at ₹1,500.50. Hold on to this trade with a stop-loss at ₹500. When the price rises to ₹2,500, alter the stop-loss to ₹1,500. Raise the stop-loss to ₹2,200 when the premium hits ₹3,000. Book profits at ₹3,500.

IN BRIEF
Short build-up on index futures
Traders can retain shorts
Nifty nearing a crucial base
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