F&O Tracker: Bearish Signals Emerge for Indices

Nifty 50 (21,572) and Bank Nifty (46,058) posted weekly losses as both indices saw a sharp decline in the middle of last week. While the former lost 1.5 per cent, the latter was down 3.5 per cent. Below is the analysis of futures and options (F&O) data of Nifty 50 and Bank Nifty.

Nifty 50

The January Nifty futures shed 1.6 per cent over the past week by closing at 21,604. Along with the decline in the contract price, the cumulative Open Interest (OI) shot up. It increased to 155 lakh contracts on January 20 as against 138.5 lakh contracts on January 12. A price drop accompanied by OI going up means fresh short build-up.

The options, too, indicate a bearish inclination. The Put Call Ratio (PCR) of January expiry options stand at 0.7. A ratio less than one shows that participants have sold more call options when compared with put options. Traders sell calls when they expect the underlying to decline.

While F&O data implies bearish inclination, the chart of Nifty futures shows that it has a support at 21,500. If this level is decisively breached, Nifty futures could fall to 21,150. The contract should break out of the resistance at 21,850 in order to regain upward momentum.

According to the options chain, there are series of resistance between 21,600 and 22,000. Because call options with strikes between these two levels (mainly round number strikes) have seen significant selling. Similarly, 21,500 and 21,000 are the nearest notable support since the put option with these strikes have the highest OI outstanding.

Considering the above factors, traders can stay away for now. Initiate bearish trades when Nifty futures slip below the support at 21,500. One can short Nifty futures or buy at-the-money put options based on their risk appetite.

Bank Nifty

The January expiry Bank Nifty futures tumbled 3.6 per cent last week as it ended at 46,136 on Saturday. The cumulative OI ballooned to 28.6 lakh contracts on January 20 versus 22.9 lakh contracts on January 12. A fall in price and OI going up simultaneously shows short build-up.

Supporting the negative inclination, the PCR of Bank Nifty is at 0.7, denoting that there has been a greater number of call option selling as against puts. The chart of Bank Nifty futures also substantiates this.

The contract closed below both 20- and 50-day moving averages. To negate the bearish stance, Bank Nifty futures ought to rise past the resistance at 46,800. Subsequent resistance is at 47,300.

But if the decline continues, Bank Nifty futures can find support at 45,000. Potential support below 45,000 are at 44,500 and 44,000.

According to the January monthly expiry Bank Nifty options chain, the nearest support levels are at 46,000 and 45,500. On the other hand, the immediate barriers are at 46,500 and 47,000.

In spite of the bearishness it is exhibiting, there is a chance for Bank Nifty to stay sideways. So, at this juncture, traders can refrain from trading.