F&O Talk| Expect consolidation breakout in Nifty above 23,500, buy on dips: Sudeep Shah of SBI Securities

Nifty ended the week by closing near its upward moving channel. The index closed at 23,465 after creating a new all-time high on Friday. On the other hand, Bank Nifty is still somewhere in the middle of its upward moving channel, closing at 50,002.

The post-election rally has taken everyone by surprise and both indices are now trading well above their short-term moving averages after testing their 200-day moving averages.

As markets continue to scale new highs, ETMarkets spoke to Sudeep Shah, Deputy Vice President and Lead Analyst, Technical & Derivatives Research, SBI Securities, about the outlook for Nifty and Bank Nifty as well as the index strategy for the week ahead. Edited excerpts of their conversation are as follows:

The markets are now hitting new highs almost every day. Do you think the indices are moving sharply higher, or will it stabilise in the near future?

Last week, the market experienced a very sharp recovery from the low of 21,281 hit on the election decision day and saw a surge of over 2,000 points in a very short span of time. While the overall sentiment remains very bullish, we anticipate that the markets may enter a periodic correction phase and witness buying on dips, with the upcoming Union Budget acting as the next major catalyst. Meanwhile, driven by positive domestic cues, fund flows have shifted in favour of mid- and small-cap stocks.

FIIs remain net short on index futures so far this week. However, short positions are coming down. How do you interpret this?

The election results that returned the NDA government to power for a third consecutive term have pushed Indian markets to new all-time highs. Foreign institutional investors (FIIs), who were 87% net short in index futures at the start of the series, have gradually reduced their short positions to 52% as of June 14. However, there has been no significant change in flows within the cash market. Since the start of 2024, FIIs have sold about Rs 1,38,221 crore, indicating that they have not yet invested enough in the market.

What does the current DII position indicate? Earlier, when FIIs were net short, DIIs were net long. But this week’s DII data shows mixed sentiments. What does this mean?

Domestic institutional investors (DIIs) have maintained a bullish stance on the markets, as reflected by their positioning in the cash segment. Except on June 4, when they sold about Rs 3,318 crore due to political uncertainty, DIIs did not sell significantly. They have emerged as strong performers during the current uptrend. They have been buyers to the tune of Rs 2,20,225 crore since the beginning of the year till January 2024, completely absorbing FII selling in cash. We do not expect any major change in DII stance at this point in time.

As per the technical placement, Nifty is close to the resistance of the upward channel and is also well above its moving average. Do you think now is the time when the price can bounce back from the resistance and test the average?

The Nifty index appears to be experiencing a period of consolidation after a highly volatile election week. In the past week, the Nifty has been fluctuating within a narrow 274-point range, the tightest weekly range seen in the past eight weeks. Despite this limited movement, the Nifty managed to close the week at a record high, gaining nearly 1%. From a technical perspective, the index’s all-time high position, coupled with bullish signals from moving averages and momentum indicators, suggests a continuation of the uptrend.

Going forward, we believe the index may continue to consolidate in the range of 23,500-23,200 zone. A strong entry from either side would open the door for a trending move. Until that happens, we recommend focusing on the broader market as these stocks are where the real action is seen, and the momentum is likely to continue.

If Nifty sustains above 23,500 level, we may witness another round of buying. In that case, it may test 23,750 level, followed by the psychological level of 24,000 points. While on the downside, the zone of 23,240-23,200 is likely to act as a crucial support for the index. Any sustained move below 23,200 level will lead to profit booking in the index towards 23,000 level, followed by 22,800 in the short term.

If the above case is true, how can the risk of fall in prices be hedged?

The index will witness a massive correction only if there is a breakdown below the 23,200 mark. In that case, traders can consider hedging their portfolio by buying ATM 23,200 PE or slightly OTM strike of 23,000.

Does PCR data indicate any situation in Nifty currently?

Nifty’s weekly put-call ratio (PCR) is currently at 1.31, while the monthly PCR is at 1.16. This indicates that option writers expect the markets to consolidate with a positive bias in the coming week. PCR is also used as a contra-indicator and is a useful derivative tool, especially when there is excessive call or put writing in the system – specifically, when the PCR reaches 1.5 on the upside or 0.4 on the downside. These extreme levels generally do not last long, enabling a trader to take a contra view close to a key support or resistance that could act as a reversal point.

What does Bank Nifty OI data indicate for the coming week?

Bank Nifty has relatively underperformed this week, with some key PSU banking stocks still recovering from the selling pressure experienced on June 4. Highest call writing is seen at 50,000 CE and 50,500 CE. A close above 50,300 could trigger short covering in the weekly expiry, potentially pushing the index towards the 50,750-50,900 zone. On the downside, support has been identified in the 49,500-49,700 range.

Do you have any strategy or levels to play on Bank Nifty in the coming week?

We believe leading private banks could make a comeback and see a rally in the next week. HDFC Bank, which has the highest weightage, is on the verge of a breakout, which could take the index higher. Traders can consider a bull spread strategy by buying 50,100 calls and selling 50,500 calls in Bank Nifty 19 June expiry.

Do you have any stock suggestions for the week ahead?

We are bullish on Indian Hotels. The stock has given a consolidation breakout on the daily scale with strong volumes. Moreover, it has formed a large bullish candle on the breakout bar, which adds strength to the breakout. Currently, the stock is trading above its short and long term moving averages. These averages are on an ascending trajectory, and they are in the desired order, which suggests that the trend is strong. The daily RSI has risen above the 60 level for the first time after 42 trading sessions.

Derivative data also supports the overall bullish chart structure.

As the technical and derivative factors are in the bullish favour, we recommend accumulating this stock in the range of Rs 615-610 with a stop loss of Rs 590. On the upside, it can test Rs 650 levels, after which it can reach Rs 680 in the short term.

,Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)