Nifty 50 (22,327) and Bank Nifty (47,125) extended the gain for the second week as they appreciated 1 per cent and 0.6 per cent respectively in the last week. Below is an analysis of the derivatives data of both indices.
Nifty 50
Nifty futures (April expiry) (22,488) broke out of a key resistance at 22,375 and rallied 0.7 per cent last week. As the price rose, the cumulative Open Interest (OI) of Nifty futures increased – it went up to 189.9 lakh contracts on March 28 versus 161.2 lakh contracts on March 22. This indicates a long build-up.
The Put Call Ratio (PCR) of Nifty weekly and monthly options stands above 1. A ratio above 1 is bullish, as it shows traders have sold more put options compared to call options. Participants sell puts when they are optimistic.
The chart of Nifty futures shows a potential for the rally to extend to 22,750, a resistance. The hourly chart shows the confirmation of an inverted head and shoulder pattern. As per this chart set up, the contract can rise to 22,750.
There could be a corrective fall from the current level, possibly to 22,350, before it surpasses 22,580 from here. So, traders can consider long positions.
Strategy: Stay away for now and buy Nifty futures when it moderates to 22,400 and 22,350. Place initial stop-loss at 22,180. When the contract moves above 22,580, alter the stop-loss to 22,400. Tighten the stop-loss further to 22,500 when the contract touches 22,650. Book profits at 22,750.
Alternatively, one can buy call options. Consider buying the 22,200-strike call option (April 25 expiry) (₹476.90) when its premium drops to ₹400. Place stop-loss at ₹280. When the price rises above ₹530, tighten the stop-loss to ₹420. Exit at ₹620.
Long build-up in Nifty futures
Short covering in Bank Nifty futures
Traders can buy futures or call options
Bank Nifty
Bank Nifty futures (April expiry) closed at 47,545 on Thursday, thereby posting a gain of 0.5 per cent for the week. But unlike Nifty futures, the cumulative OI of Bank Nifty futures saw a decline – it dropped to 50.2 lakh contracts on March 28 as against 55.8 lakh contracts on March 22. A rise in price along with a fall in OI implies short covering.
The PCR of both weekly and monthly expiry of Bank Nifty options are near 1, indicating nearly similar levels of selling of both call and put options. So, the positioning of option traders does not denote any leaning.
The price action shows positive inclination, especially post the breakout of 47,500 last week. However, Bank Nifty futures is likely to depreciate to 47,000, either from the current level or after moving up to 48,000. Then, it is expected to see an upswing to 48,650. So, traders can wait before initiating fresh longs.
Strategy: Go long on Bank Nifty futures if it falls to 47,200. Keep an initial stop-loss at 46,300. When the contract rallies above 48,000, tighten the stop-loss to 47,300. Liquidate the longs at 48,600.
For lower risk and margin obligation, traders can consider buying the April 24 expiry 46800-strike call option, which closed at ₹1,183.75 last week. Stay on the fence and buy when its price falls to ₹1,000. Initial stop-loss can be at ₹540. When the premium goes beyond ₹1,500, raise the stop-loss to ₹1,200. Exit at ₹1,900.