Nifty 50 (23,813) and Bank Nifty (51,311), largely due to the gap-up open on Monday, posted a gain of 1 and 1.1 per cent respectively last week. Here is an analysis of the futures and options data of both indices.
Nifty 50
Nifty futures (January) (23,993) was up 0.8 per cent last week. The intraweek price action shows that the contract began last week with a gap-up open but then was moving across a sideways trend through the week.
The candlestick on Friday shows that the attempt to recover faced a considerable sell-off, leading to a longer upper wick. So, the sellers are present at higher levels and as it stands, rallies are being sold into.
The chart also shows that Nifty futures face a resistance between 24,000 and 24,250. So long as the contract trades below 24,250, the broader bias will be bearish. There is a chance for Nifty futures to see one more leg of fall from here, possibly to 23,000.
On the other hand, if the contract breaks out of 24,250, the outlook can turn positive and can lift it to 25,000, a notable barrier. Subsequent resistance is at 25,200.
The Put Call Ratio (PCR) of Nifty January month options stood at 1.3. This means that traders have written (sold) comparatively more put options than call options. Participants write puts when they expect the underlying to go up.
Nevertheless, for Nifty futures to build a sustainable rally, it should surpass the hurdle at 24,250.
Strategy: Short Nifty futures at 24,000 and place a stop-loss at 24,250. When the contract falls to 23,600 after the trade is initiated, trail the stop-loss to 24,000. Further, when Nifty futures slips to 23,300, tighten the stop-loss to 23,550. Book profits at 23,100.
Bank Nifty
Bank Nifty futures (January) (51,724) appreciated 1 per cent over the last week. Likewise in Nifty futures, the gain was mainly because of the gap-up open on Monday. In the following sessions, the contract was charting a sideways trend.
The price action since July shows that Bank Nifty futures has largely been trading between 49,800 and 54,000. Although the contract is now closer to the bottom of the range, there are no signs of a bullish reversal.
Given the prevailing conditions, we anticipate Bank Nifty futures falling to 49,800 in the near term. A breach of 49,800 can intensify the sell-off, potentially leading to a swift decline to 48,000.
But if the contract rallies from the current level and breaks out of 52,000, its nearest resistance, the upswing can extend to the 53,800-54,250 price band. But for Bank Nifty futures to establish the next leg of long-term upswing, it should decisively breach 54,250.
Strategy: Considering the current conditions, traders can short Bank Nifty futures at 52,000 with a stop-loss at 52,500. When the contract slips to 51,000, trail the stop-loss to 52,000. On a fall to 50,500, tighten the stop-loss to 51,200. Book profits at 50,000.
In case of both Nifty and Bank Nifty, instead of going short on futures contracts, traders can consider buying put options.
We suggest buying the at-the-money put option of the January monthly series. Entries and exits can be based on the movement in futures contract of the respective indices.