Technical Analysis

Will Nifty 50 cross over 12,000-mark?

Akhil Nallamuthu | Updated on October 22, 2020

Despite a volatile session on Wednesday, the Indian market closed in the green where the benchmark indices, the Nifty 50 and the Sensex gained 0.34 per cent and 0.4 per cent, respectively. The Nifty bank outperformed as it wrapped up the session with a gain of 1.3 per cent, extending the outperformance since the low of September 24.

Banking and metals stocks backed up the bulls on Wednesday.

But the interesting part is how the market behaved during the course of the trading session. Post a positive open, corroborated by the bullish Asian market, the domestic market opened on the front foot and continued to extend the rally from Tuesday. The Nifty 50 crossed over the 12,000-mark and registered an intraday high of 12,018.1 whereas the Sensex marked an intraday high of 40,975.62; the Nifty bank index hit a high of 24,821.45.

However, the trend reversed abruptly after the European markets opened and what followed was a significant fall. From the intraday high, the Nifty 50 fell by over 200 points to mark the day’s low of 11,776.25 before staging a sharp recovery during the final hour of trade.

Looking at the daily chart, the Nifty 50 and the Sensex are facing a critical resistance at 12,000 and 41,000 respectively; the fate of the current rally depends on whether these levels are cracked sooner than later. However, the Nifty bank index seems to have more space on the upside and is likely to touch 25,000 in the short run. As it stands, banking stocks could continue to perform well.

A look at derivatives

Even as the market moved both the ways sharply during the day, we can gain some insight by looking at the numbers of futures and options contracts.

While there was liquidation in the October series 12,000-strike call option (12,000 CE), call options with a strike price of 12,100 and 12,200 saw fresh writing. That is, a fresh number of contracts added in 12,100 CE and 12,200 CE on Wednesday were 1,562 and 2,864 contracts.

When a trader writes a call option, he is basically not expecting the underlying to move above that level. So, this means, even if the index breaches the psychological level of 12,000, it can face a roadblock at 12,200 at least until the end of the current expiry.

At the other end, writing of put options with a strike price of 11,900 and 12,000 can be seen i.e. 11,900 PE and 12,000 PE saw an increase in the number of fresh contracts by 1,886 and 1,909. Which means many participants expect the Nifty 50 index to close above 12,000-level by the end of the October expiry.

The above data points indicate that the potential trading range for the current expiry going forward could be 11,900 to 12,200. Interestingly, the positioning of Foreign Institutional Investors (FIIs) is bullish as they have increased their net long in index futures (across all active expiries) to 45,762 contracts from 43,433 contracts on Wednesday. Similarly, there is an increase in net index call long options to 87,436 contracts from 70,623 contracts.

The above data points indicate that the index can be inclined to uptrend and there is a chance for it to inch above 12,000 level. However, the likelihood of it breaching 12,200 looks remote.

As per the daily chart, below 11,900 the index has supports at 11,830 and 11,780.

As a word of caution, traders should note that the US market ended lower yesterday as the stimulus talks drag on. Following this, early risers in Asia have opened below yesterday’s close. This can weigh on the Indian market as well and a decisive breach of 11,900 by the Nifty 50 can attract more sellers.

Published on October 22, 2020

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