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Market sentiment shifted early on last week and both Nifty 50 (22,023) and Bank Nifty (46,594) depreciated. While the former lost 2.1 per cent, the latter was down 2.6 per cent. The futures and options (F&O) data is now giving a bearish inclination. Here’s an analysis.
Nifty 50
Nifty futures (March contract) posted a loss of 1.9 per cent last week as it ended at 22,133. As the contract moved south, the cumulative Open Interest (OI) of Nifty futures increased – it went up to 161.4 lakh contracts on March 15 versus 154.8 lakh contracts on March 7. A fall in price and an increase in OI implies short build-up.
Not just the futures, the options data also indicates weakness. The Put Call Ratio (PCR) of the weekly expiry stood at 0.80, which means participants selling a greater number of call options than put options. Traders short calls when they are bearish.
However, the chart shows that Nifty March futures managed to close above the 50-day moving average (DMA), which now lies at 22,120. Also, 22,000 is a good base. So, for the bears to establish a sustainable downtrend, they ought to drag the contract below 22,000.
A breach of 22,000 can lead to a decline to 21,800, its nearest support. But if there is a rebound, the contract can face its first barrier at 22,400.
As per the option chain and the price action of Nifty futures, the support levels below 22,000 are at 21,800 and 21,500. Similarly, the price region between 22,400 and 22,600 is the nearest resistance.
From a trading perspective, one can consider long sided trades (futures or call option longs) on the back of the support at 22,000. But one should stay cautious. Exit this trade if 22,000 is breached and then consider taking short trades (futures short or long puts).
Bank Nifty
Bank Nifty futures (March series), which broke out of the hurdle at 47,700 in the first week of this month, failed to advance further. Instead, it declined over the last week and closed at 46,695, losing 2.6 per cent.
As this occurred, the cumulative OI of Bank Nifty futures shot up to 54.6 lakh contracts on March 15 from 47.2 lakh contracts on March 7. Thus, short build-up was seen in Bank Nifty futures too.
Substantiating the bearishness, the PCR of both weekly and monthly options, at 0.7 and 0.8 respectively, are below 1 because of relatively more call option selling, a bearish sign.
The chart shows that the contract is now below both 20- and 50-DMAs. It has also slipped below the support at 47,000. So, the odds for further decline are high.
The key support levels, according to the Bank Nifty futures chart and the options chain, are at 46,000 and 45,400. For the trend to turn bullish, the contract should surpass the important resistance at 47,000. Immediate barriers above this level are at 47,700 and 48,200.
Given the prevailing chart set up and the F&O data, traders can consider going short on Bank Nifty futures or buy at-the-money Bank Nifty monthly put options. If there is a recovery above 47,000 exit futures short and go long. Similarly, liquidate the puts and go for call longs post the breakout.
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