Bears have been doing the rounds over the past week in the domestic market. Nifty 50 (22,055) and Bank Nifty (47,421) lost 1.9 per cent and 3.1 per cent respectively. The charts of these two indices suggest that the bears may have only warmed up and there could be more downside to come in the forthcoming weeks. The futures and options data conform to this. Below is our analysis.

Nifty 50

Nifty futures (May expiry) (22,140) saw the arrival of fresh shorts in the recent sessions. While the contract posted a weekly loss of 1.9 per cent, the cumulative Open Interest (OI) of Nifty futures increased to nearly 150 lakh contracts on Friday versus 118 lakh contracts a week ago.

The weekly options, too, substantiate the bearishness as we could see more call option selling compared with put selling, leading to a Put Call Ratio of 0.7. A ratio less than 1 is because of comparatively more call writing, a bearish sign.

The chart of underlying Nifty 50 shows that it has been making higher highs and higher lows since the beginning of 2024. However, the distance between each high has been shrinking. Now hovering around a support, if the index breaches this level, it will lead to formation of a lower low. This is a bearish signal, and this can weigh on Nifty futures as well.

The May Nifty futures’ chart denotes that it is trading just above a key support at 22,000. A break below this level can trigger a fall to 21,500, its nearest support. Subsequent support is at 21,200. For the bulls to regain traction, they ought to push the contract above 22,300. Even then, the scope for a rally appears limited at the moment.

Strategy: Sell Nifty futures if it slips below the support at 22,000. Target and stop-loss can be at 21,500 and 22,250 respectively. As a risk management measure, after the short trade is initiated, revise the stop-loss to 22,000 when the contract falls to 21,700.

Instead of selling futures, one can also consider buying monthly expiry put options (preferably 22000-strike), which requires lower margin and comes with lower risk. Book out of this option at the prevailing price when Nifty futures depreciate to 21,500.

Traders with higher risk appetite can consider going long at the current level of 22,140 since the support at 22,000 is now valid. Target and stop-loss can be 22,500 and 21,960. But if the support at 22,000 is taken down and the stop-loss is hit, go short. Target and stop-loss can be as mentioned above.

Derivative outlook
Index futures near a critical base
Weekly options show bearish bias
Go short after the support is broken
Bank Nifty

Bank Nifty futures (May expiry) (47,607) has been dancing to the tunes of bears since the start of this month. Last week, the futures saw a fresh short build up as the decline in price was accompanied by an increase in the cumulative OI – it went up to 27.6 lakh contracts on Friday compared with 23.6 lakh contracts a week ago.

The PCR of weekly (0.7) and monthly (0.8) options are less than 1, falling in line with the bearish indication given by the futures. Like in Nifty, at-the-money and nearby out-of-money call options have been sold well, meaning a rally, if any, can be capped anytime.

Bank Nifty futures is now hanging around the support at 47,500. Below this is a trendline, which the contract could meet at 47,200. Therefore, the price area of 47,200-47,500 is a support band.

If the contract falls below 47,200, it can establish a fresh leg of downtrend, which can drag it to 46,000. The downswing might as well extend to 45,500. On the other hand, if there is a recovery from the current level of 47,607, the immediate barrier the bulls will face is 48,000. Potential resistances above this price point are at 48,500 and 49,000.

Strategy: Short Bank Nifty futures with stop-loss at 47,800 if it breaks below 47,200. Revise the stop-loss to 47,000 when the contract moderates to 46,500. Liquidate the position at 46,000.

Alternatively, participants can buy monthly expiry put options (preferably 47000-strike) once the contract declines below 47,200. Exit this option at the going rate when the Bank Nifty futures touches 46,000.

Participants with higher risk appetite can buy Bank Nifty futures now at 47,600 since it has a support ahead. Target and stop-loss can be at 48,800 and 47,000 respectively. When the contract surpasses 48,200, tighten the stop-loss to 47,600. If the stop-loss of this is hit, consider the above recommended short trade.