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

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

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

As the markets move towards making new highs frequently, ET Markets interacted with analyst Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research, SBI Securities regarding the outlook on Nifty and Bank Nifty along with an index strategy for the upcoming week. Following are the edited excerpts from his chat:

The markets are making new highs almost each day now. Do you think the indices are headed towards a swift northward movement, or will it become steady in the near future?

Markets experienced an extremely swift recovery last week from the lows of 21,281 made on the day of Election verdict with more than 2,000 points rebound in a very short span of time. While the overall undertone is extremely bullish, we anticipate that the markets may enter a period of time-wise correction and witness buying on dips, with the upcoming union budget serving as the next major catalyst. Meanwhile, fund flows have shifted in favor of mid and small-cap stocks, driven by positive domestic cues.

In this week so far, the FIIs have remained net short on the index futures. However, the short positions are declining. How do you interpret this ?

The election verdict leading to the NDA government’s return to power for a third consecutive term has propelled the Indian markets to new all-time highs. Foreign Institutional Investors (FII), 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 14th. However, there has been no significant change in flows within the cash market. Since the beginning of 2024, FIIs have sold approximately Rs 1,38,221 crore, indicating that they have not yet made a substantial comeback in the market till now.What does the current DII standing indicate? Previously, when FIIs were net short, DIIs were net long. But this week’s DII data indicates mixed sentiments. What does this mean?

Domestic Institutional Investors (DIIs) have maintained a bullish outlook on the markets, as evidenced by their positions in the cash segment. Except for June 4th, when they sold approximately Rs 3,318 crore due to political uncertainty, DIIs have not engaged in significant selling. They have emerged as strong performers during the current bull run. They have been buyers to the tune of Rs 2,20,225 crore since the beginning of the year from January 2024, completely absorbing the FII selling in cash. We do not anticipate any major shift in stance from DIIs at this point.

As per the technical placement, Nifty seems to be near the resistance of the upward channel and also quite above its moving averages. Do you think now is the time when the price might retrace from the resistance to test the averages?

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

Going ahead, we believe the index may continue to consolidate in the range of 23,500-23,200 zones. The penetration with strength on either side would open gates for a trending move. Till it happens, we recommend concentrating on the broader market as the real action is seen in these stocks, and momentum is likely to continue.

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

If the above case is true, how can one hedge against the risk of fall in prices?

A correction of sizable nature will be seen only once the Index witnesses a breakdown below the mark of 23,200. In that case, traders can consider hedging their portfolios by purchasing ATM 23,200 PE or slightly OTM strike of 23,000.

Does the PCR data currently indicate any positions in Nifty?

The Nifty’s weekly Put-Call Ratio (PCR) currently stands 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. The PCR is also used as a contra-indicaor and is a useful derivative tool, especially when there is extreme call or put writing in the system—specifically, when the PCR approaches 1.5 on the upside or 0.4 on the downside. These extreme levels generally don’t sustain for longer enabling a trader to take a contra view closer to an important support or resistance that can act as a reversal point.

What does the Bank Nifty’s OI data indicate for the upcoming week?

Bank Nifty has relatively underperformed this week, with some major PSU banking stocks still recovering from the selling pressure experienced on June 4. The highest call writing is observed 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 is identified in the 49,500-49,700 range.

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

We believe that frontline private banks could make a comeback and witness traction in the following week. HDFC bank, which has the highest weightage, is on the verge of a breakout, which could propel the index higher. Traders can consider doing a bull spread strategy in Bank Nifty 19th June Expiry with purchasing a 50,100 Call and selling 50,500 Call.

Any stock recommendation that you might have for the upcoming week?

We are bullish on Indian Hotels. The stock has given consolidation breakout on a daily scale backed by robust volume. In addition, it has formed a sizable 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 in rising trajectory, and they are in the desired sequence, which suggests the trend is strong. The daily RSI has surged above 60 levels for the first time after 42 trading sessions.

The derivative data also supports the overall bullish chart structure.

With the technical and derivative factors aligning in favor of bulls, we recommend accumulating the stock in the zone of Rs 615-610 with the stop loss of 590. On the upside, it is likely to test the level of Rs 650, followed by 680 in the short term.

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