F&O Talk: Go long in Nifty, Bank Nifty with buying on declines, says Shilpa Rout of Prabhudas Lilladher

Frontline indices Nifty50 and Bank Nifty scaled new highs of 24,174 and 53,180 points, respectively, last week and have since sustained these levels. The benchmark Sensex advanced 1,000 points in just 17 trading sessions.

Both the Sensex and Nifty gained for four consecutive sessions before closing Friday’s trading session in the red. However, both indices managed to sustain their gains and closed the week positively.

Analyst Shilpa Rout, AVP of Derivatives Research at Prabhudas Lilladher, discussed the outlook on Nifty and Bank Nifty with an index strategy for the upcoming week in an interaction with ETMarkets. Here are the edited excerpts from her chat:

In the past five trading sessions, Nifty has seen four consecutive green candles, closing above 24,000 and maintaining this level on Friday. Does this development pave the way for a move to the next significant level? If so, what level do you foresee?

From a market perspective, the trade is undoubtedly on the long side. However, it would be quite prudent to exercise some degree of caution now. Since the FIIs’ net long is currently at an all-time high of 82%, they can begin to rise in the short. After all, mining and longs can occur. In that scenario, Nifty may potentially experience a 400–500 point drop. Additionally, Bank Nifty is also able to detect up to 1,000 significant points. I don’t see how the sentiment has changed, then. It’s not as strong, but this is the place where you should start recording your profits and take your time until there’s some consolidation.

What is your outlook for Nifty and Bank Nifty for the July Series?

The outlook for Nifty suggests targets around 24,300 and 24,500, particularly on declines. The 23,350 level is a crucial support, so it’s advisable to stay long if this support holds. However, I don’t recommend going completely long right now; it’s better to wait for a decline. For Bank Nifty, as long as it stays above the previous crucial resistance of 51,500, we can expect to see levels of 54,500. A decline of about a thousand points from the current level is possible, which would provide an excellent opportunity to go long.

The highest call writing for Nifty stands at 24,500 and put writing at 24,000. Do you foresee a range-bound oscillation in the index?

The weekly sector has returned to align with the monthly sector. The option chain appears much more bullish than anticipated. For the weekly sector, 24,500 to 25,000 call writers are very active, with significant activity at the 24,000 and 22,500 puts. This suggests a more aggressive downside play for the week compared to the monthly expiry chain, which shows a range between 24,000 and 23,000, with 24,000 acting as resistance. This will likely play out, but not immediately, as some consolidation is expected.

Historically, the post-July series has been positive over the last five years. Despite a strong rally in June, July might be more challenging. The main caution is the FII data, which shows net longs have increased from 13% to 82%. This suggests limited upside potential, so profit-taking could create an opportunity to go long on the downside for both Nifty and Bank Nifty.

For Bank Nifty, the highest call writers are near the ATH levels, while put writers at 52,500. Does this indicate a potential correction, which may also be supported by the fact that the prices are way above the 10-day EMA?

Considering the PCR data, option chain data, FAS data, and BEGS, there is a general sense of caution in the market. Technically, the 53,100 zone is a strong resistance level, as seen when the market reached highs around this level and began consolidating. Despite this, the expected correction hasn’t occurred, indicating market strength. Therefore, a significant one-sided correction isn’t likely. The 52,000 and 51,500 levels are key support zones, with 51,500 being a previous resistance from which the rally started. It’s plausible that the market could move towards 52,000. For risk-takers, setting a stop-loss at yesterday’s high of 53,200 might be prudent, while aiming for a target of 52,000.

However, for safer trading, I recommend waiting for a dip before buying, as the market is currently favouring buy-on-dip strategies.

Until last week, the market was optimistic about banking stocks. So does this also mean that it might be time for some profit booking in the sector?

Yes, up until last week, at the end of the June series, analysts were quite bullish on the banking sector overall. Major heavyweights like HDFC Bank, ICICI Bank, and Axis Bank have shown strong performance and aggressive stances, with no significant long positions being closed.

Let’s talk stocks for a moment here, with the upcoming Budget, which sectors could one keep an eye on?

There has always been a belief that the budget favours textile, chemical, and fertilizer stocks. Recently, these sectors have experienced a strong rally, followed by a few sessions of consolidation. Today, there is renewed activity in these stocks. I have recommended GNFC, which is trading around 706, with futures at 708. I believe the stock could reach levels of 740 to 750 positionally. Additionally, Chambal Fertilizers is worth watching. As long as it trades above 500, the stock has the momentum to test 540 again.

Apart from the Budget allocation across sectors, there is also an intention for the government to impose higher taxation on F&O income. How do you anticipate this update?

There has been a lot of discussion over the past week about what will happen, and everyone has their views on the matter. Last week there was a Sebi board meeting and despite everything, the market remains unaffected today. It seems participants aren’t too concerned, as the ongoing trends continue. The tighter norms appear to impact macro aspects more than micro ones for retail participants.

Regarding the Sebi update on Thursday, which changed the norms for entry and exit criteria of stocks in the F&O segment, it’s unlikely to have significant implications for traders.

This move is more about Sebi safeguarding the interests of all participants, big and small, and making the process smoother. It’s a positive change that adds precaution, ensuring that stocks in the F&O segment have adequate liquidity, participation, and credibility. The F&O market has grown significantly in the past four years, which was unexpected, so it’s good that the government is keen on protecting small investors. This update shouldn’t worry small traders; instead, it will provide more options and scripts to choose from, addressing long-standing discussions about certain stocks in the cash market.

What are your expectations for the India VIX during an event like the Union Budget?

This is a significant event and should present a buying opportunity. I don’t expect much volatility, as the presence of a stable government has instilled confidence among participants. The government is continuously working to make things more precise and proper, which is fueling this rally. In the last 20 years, we haven’t seen anything quite like this sustained growth, which some have termed “Amritkal”. Despite concerns that this might be a bubble, the fact that it hasn’t burst suggests underlying strength. The government’s efforts are having a positive impact, protecting the interests of all participants. Thus, the Budget will always be a highly anticipated event for the market, reinforcing the ongoing confidence.

Lastly, any index strategies for our traders out there?

For Nifty, if you want to initiate fresh long positions, wait for declines and consider entering in two to three tranches. Keep a tight stop loss at around 23,300 and aim for targets of 24,300 to 24,500. Similarly, for Bank Nifty, look for opportunities to go long on declines, maintaining a tight stop loss at 51,500. Target levels are 53,500 to 54,000.

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