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The Nifty 50 (17,859) and the Nifty Bank (42,189), which began last week on the front foot by gaining in the first two sessions, saw a sudden change in trend. Both indices faced significant sell-off since Wednesday; while Nifty 50 lost 1.4 per cent, Nifty Bank was down 1.9 per cent over the past week.
Looking at the derivatives data of both indices, bears seem to have made a strong comeback as there is considerable short build-up on futures and substantial call selling in the nearest weekly options on both the indices.
Nifty 50
The January futures contract of Nifty 50 lost 1.4 per cent last week to close at 17,948, thereby closing below the key support of 18,000. As the price fell, the futures saw fresh shorts coming in — the cumulative Open Interest (OI) of Nifty futures increased to nearly 136 lakh contracts on Friday compared with 117 lakh contracts by the end of the preceding week. A drop in price along with an increase in OI short build-up. There is a minor drop in the futures premium, indicating weakness.
On the other hand, the option chain of the nearest weekly expiry (January 12) shows that the Put Call Ratio (PCR) stands at 0.55, which reveals huge call writing - nearly twice the number of puts sold in the same expiry. This is a bearish indication as the participants expect only a limited rally during the current expiry.
18000- and 18100-strike call options have the maximum number of outstanding OI and so, these can be strong resistance in case the index rallies. Coming to put options, 18000-strike put has the highest OI and such puts are generally considered as support levels. However, considering other metrics, a rally above 18000, at least in the current expiry, is less likely. Otherwise, the 17500- and 17000-strike put options have the most number of OI. Thus, these are the potential support levels.
Overall, the futures and options show clear bearish bias and consequently, the Nifty 50 will most likely fall further from the current level.
Nifty Bank
The Nifty Bank January futures declined 1.9 per cent over the past week and closed at 42,363. Even though the premium at which the future is trading over the spot has not dropped like in Nifty 50, there has been considerable short build-up last week.
The cumulative OI of Nifty Bank futures shot up to 27.1 lakh contracts on Friday compared with 23.4 lakh contracts by the end of the previous week. This along with a drop in futures price shows short build-up.
The option chain of January 12 expiry gives a good bearish picture as the PCR stands at 0.51. That is, call selling has been at two times that of put selling. The 42500- and 43000-strike call options have the highest number of outstanding OI and thus, there price levels are expected to be barriers in case the Nifty Bank index goes up. On the other hand, 42000- and 41500-strike puts have the most number of OI, which are the potential support levels for the index.
Considering the above factors, the Nifty Bank is forecast to see a drop. But given that it has support near-by, there is a slim chance that Nifty Bank, though it could fall, might outperform Nifty 50.
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