F&O Talk| Nifty charts don’t show weakness, prefer bull call spread: Sudeep Shah of SBI Securities

Bulls are in full control of the market at present as Nifty ended its sixth consecutive week with gains. However, the week saw profit booking at higher levels for Bank Nifty.

The week broadly saw range bound movement for both the indicators but the price is placed comfortably above the 10 day EMA in the weekly time frame. The 50-component Nifty index ended Friday up 0.8% or 186 points at 24,502 while the Bank Nifty closed flat at 52,278 up 0.02% or 8 points.

SBI Securities Deputy Vice President and Head of Technical and Derivatives Research Analyst Sudeep Shah spoke to ET Markets on the outlook for the Nifty and Bank Nifty along with the index strategy for the coming week. Following is an edited excerpt from their chat:

Indices are facing resistance at their ATH levels. Do you see a consolidation phase after the rally? What is your view on Nifty and Bank Nifty?

In line with our expectations, the Nifty IT strongly outperformed the frontline indices as it rallied around 4%. On a weekly basis, it has given a cup and handle pattern breakout. In the current week, the Nifty IT index has played a major role in driving the market’s upward trajectory. During the past two weeks, continued sector rotation is helping the market to sustain as well as move higher. The benchmark index, Nifty, ended on a positive note for the sixth consecutive week. Moreover, it ended above the 24,500 mark for the first time.

From a technical perspective, although the last two trading sessions have witnessed consolidation, the chart does not show any weakness. Momentum indicators and oscillators suggest room for some more upside. Further, around 84% of Nifty’s constituents are trading above their 20-day EMA, indicating strong intrinsic strength of the index.

However, with a major event like the Union Budget just a week away, we suggest keeping a balanced risk-reward approach at current levels and following strict stop-loss strategies. Talking about the levels, the 10-day EMA zone of 24,250-24,200 will act as a strong support for the index. As long as the index trades above 24,200, it is likely to continue its upward journey and test 24,900 then 24,700 levels in the short term. Whereas, on the downside, if the index slips below the 24,200 level, the next support is placed at the 23,950 level.

Whereas, for the Bank Nifty which has also been consolidating over the last few sessions, the zone of 51,800-51,700 will act as a crucial support for the index as it is the confluence of the 20-day EMA level and the recent swing low. If the index slips below the 51,700 level, the next support is placed in the 51,300-51,200 level zone. While, on the upside, any sustained move above the 52,600 level would resume its northward journey. In that case, it is likely to test the 53,000 level in the short term.

How should a trader approach indicators? Any trading strategies?

We suggest accumulating quality stocks at lower levels if Nifty dips marginally. Index option traders can try bull call spreads to capture potential upside while limiting losses in case of any corrective action on losses.

What does open interest positioning indicate for Nifty and Bank Nifty?

Talking about Nifty, there is significant concentration of call open interest at 24,600 strike, followed by 24,700 strike. While significant open interest on the put side is seen at the 24,400 strike, followed by the 24300 strike. According to the straddle cost of the ATM strike, the range for the next week will be 24,250-24,750 levels.

Examining the Bank Nifty option chain, a significant concentration of call open interest is at 52,500 strike, while on the put side significant open interest is seen at 52,000 strike. According to the straddle cost of the ATM strike, the range for the next two trading sessions will be around 52,800-51,750 levels.

Shipbuilding companies and fertilizer stocks are in high action ahead of the budget. What are your thoughts from a technical as well as a long-term perspective?

Shipping stocks like SCI, GE Shipping as well as Cochin Shipyard have shown excellent momentum in the past few weeks and may continue their upward move in the coming week as well. However, from a risk reward perspective, fresh entry does not look attractive at current levels and hence recommend partial profit booking in shipbuilding stocks as they are in overbought zone on weekly basis and rest should be with stop loss of 10. Day EMA level.

Aided by the seasonal factor, select fertilizer stocks like RCF, NFL, Coromandel and FACT are witnessing bullish momentum with strong volumes. Hence, we believe that preferred fertilizer stocks are likely to continue their upward journey.

Railways and defense stocks have also shown huge gains in the last 1-2 years and still don’t seem to be slowing down. What do you think one should do – wait for a correction – or is it still OK to take a new position to ride the big rally?

For those holding railways and defense stocks we recommend placing a stop loss at the 10-day EMA level of the respective stocks. The main trend of these stocks is bullish, with a sequence of higher tops and higher bottoms and volume driven buying is also seen at higher levels.

For new entries, we would recommend waiting for the dip as the risk reward is not favorable at current levels. We think avoiding the feeling of FOMO will be very crucial over the next few weeks, from a trading as well as an investment perspective.

With the next budget, what other areas can be focused on?

Technically, Nifty IT has given cup and handle breakout on weekly basis. We believe it is likely to continue its upward journey in the next couple of weeks, especially after the TCS quarterly results.

Nifty FMCG also outperformed the frontline indices. It has also given consolidation breakout on weekly basis.

Apart from this, Nifty Oil & Gas, Nifty PSE, Nifty CPSE and Nifty Pharma are likely to continue their upward journey in the next two trading sessions.

The minimum lot size of a derivative contract is currently Rs. 5 lakhs to Rs. 20 lakhs- Rs. 30 lakhs and what is your view on SEBI’s working committee recommendations on limiting weekly options to a single expiry per stock exchange per week?

The proposed measures are aimed at curbing sharp growth in derivative volumes and reducing speculation driven by high retail participation, which has been witnessed post-Covid. Weekly option expiration plays a major role in the phenomenal surge in option trading volume. These proposed measures by SEBI, if implemented, will definitely impact volumes. However, until the measures are officially announced, it would be prudent to avoid any speculation about them.

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