Nifty 50 appreciated 2.8 per cent last week, marking its biggest weekly gain since April. Both Nifty 50 and Nifty Bank indices rose for two consecutive weeks, turning the near-term outlook positive. Data showed short covering as traders sold more put options, which helped the market sentiment turn clearly bullish now.
Reversal patterns emerge in Nifty 50 whereas Nifty Bank is testing a crucial barrier
Nifty 50 (23,146) appreciated 2.8 per cent last week, the biggest weekly gain since April. Nifty Bank (55,844) advanced 1.1 per cent. Both indices have risen for two consecutive weeks now and have turned the near-term outlook positive. Below is an analysis.
Nifty 50
Nifty (Oct) futures (23,119) rose 2.2 per cent last week. But the outstanding Open Interest (OI) dropped 11 per cent to 170 lakh contracts. A price rally along with a decline in OI denotes short covering.
The options positioning also supports the positive bias. The PCR (Put Call Ratio) of October monthly options increased, albeit marginally, from 1 to 1.10 over the last week. The ratio went up as traders sold relatively more put options compared to calls. Participants sell puts when they are bullish.
So, the change in the futures and options data over the last week shows that the sentiment is turning bullish.
The chart also falls in line with the bullishness. The October futures has now formed a morning star candlestick pattern on the weekly chart, hinting at a trend reversal. Also, the contract has now moved above the 21-day moving average.
That said, there is a chance for a minor correction from the current level, possibly to 22,850-23,000 price band. But eventually, we expect Nifty (Oct) futures to move up to 23,600.
However, if the contract drops and slips back below the support at 22,850, the bears will regain traction leading to a decline to 22,600 and subsequently to 22,250.
Overall, as it stands, the derivatives data and the chart provides a positive outlook for Nifty futures.
Strategy: Buy Nifty (Oct) futures if it dips to 22,900. Place stop-loss at 22,550. When the contract rallies to 23,350, alter the stop-loss to 23,200. Book profits at 23,580.
In case the contract rises past 23,250 without a correction, traders can initiate fresh longs with a stop-loss at 23,050. Book profits at 23,580.
Nifty Bank
Nifty Bank (Oct) futures (55,918) rallied 0.8 per cent last week. The outstanding OI of this contract decreased by 3 per cent to 22.8 lakh contracts. Thus, similar to Nifty futures, Nifty Bank futures too witnessed short covering.
The PCR of October futures stood at nearly 1.10 on Friday, increasing from 1 by the end of the preceding week. Thus, futures and options data indicate some positive development.
However, the chart is yet to confirm a breakout. While the October futures surpassed the hurdle at 55,600 and the 21-day moving average, which is now at 55,675, there is another barrier at 56,000. The 38.2 per cent Fibonacci retracement of the recent downtrend coincides at 56,000, making it an important level to breach and to confirm a trend reversal.
A daily close above 56,000 can be a strong indication of further rally. A breakout of 56,000 can lead to an upswing to 57,000. Notably, the price band of 57,000-57,250 is a resistance. Subsequent resistance is at 57,800.
Instead, if the Nifty Bank (Oct) futures drops from the current level, it can find support at 55,600 and 55,000. A breakdown below 55,000 can intensify the sell-off. Immediate support below 55,000 can be spotted at 54,650.
On the whole, there are positive indications but the final confirmation of the breakout of 56,000 is pending. Once this happens, Nifty Bank futures can rally with ease.
Strategy: Go long after the October futures breaks out of 56,000 with a stop-loss at 55,300. When the contract touches 56,600, revise the stop-loss to 56,200. Book profits at 57,000.
Alternatively, if the Nifty Bank futures moderates to 55,400, initiate fresh buy. Keep stop-loss at 54,700. When the contract rises to 56,600 raise the stop-loss to 56,200. Exit at 57,000.