Nifty 50 (23,092) and Bank Nifty (48,368) lost 0.5 per cent and 0.4 per cent respectively last week. The former hit a fresh seven-month low of 22,977 last Tuesday, before recouping some of its losses in the following sessions. Below is an analysis of futures and options (F&O) data of both indices.

Nifty 50

Nifty futures (January) (23,114) slipped 0.7 per cent last week. The cumulative Open Interest (OI) rose for the fourth consecutive week, and it stood at about 197 lakh contracts on January 24. Thus, fresh shorts continue to arrive.

The Put Call Ratio (PCR) of the January options stood at nearly 0.8 as comparatively more call options were sold than the puts. Traders sell calls if they are bearish.

While the F&O data continues to indicate a downward bias, the chart shows that the underlying Nifty 50 has a strong support at the current levels. For Nifty futures, the price band of 22,900-23,000 is a considerable base.

If there is a recovery on the back of this support, we might see a 700–800-point rally from here. Hence, Nifty futures can touch 23,800. Resistance above 23,800 is at 24,000.

However, on the back of the prevailing bearish inclination, if Nifty futures breach the support at 22,900, it can decline to 22,000-22,200 region. A break below 22,000 can turn the medium-term trend negative. Nearest notable support below 22,000 is at 20,000.

Strategy: We had suggested a short position on Nifty futures (January) between 23,400 and 23,500. The recommended target was 23,000 whereas the contract marked a low of 23,020 last week. Considering the recent price action, we suggest exiting the trade at 23,100 as there is support ahead.

Refrain from initiating fresh trades for now.

Bank Nifty

Bank Nifty futures (January) (48,375) recorded a loss of 0.4 per cent last week. While it opened on an encouraging note last week, the trend soon turned down and the contract declined for the rest of the week. The cumulative OI increased for the fourth week in a row as uptick in early last week attracted fresh short sellers.

The PCR stood at nearly 0.5 on Friday for the third week in a row. Hence, since the beginning of January, the number of calls options sold have stood at around twice the number of puts options sold. So, there has been a consistent bearish bias.

The chart also affirms the weakness as Bank Nifty futures stays below 50,000. The nearest notable support for Bank Nifty futures comes in only at 46,400-46,000 price band. To avoid this fall, the contract should top the key 50,000-mark.

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

Strategy: A couple of weeks ago, we recommended going short on Bank Nifty futures (January) at 48,886. Hold on to this trade. But move the stop-loss down from 51,250 to 50,250.

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.

In case neither target nor stop-loss is hit until the open on Thursday, traders can consider rolling over the short from January to February contract at the prevailing price.

As an alternative to futures short, we suggested buying 50000-put for an average purchase price of ₹1,175. At the end of Friday, the premium stood at ₹1,678.55. Retain this position with a stop-loss at ₹500. However, revise the target down from ₹3,500 to ₹2,500.

In brief
Traders continue to add shorts
Bank Nifty appears weaker than Nifty
Exit Nifty short; retain Bank Nifty sell
Related Topics