F&O Tracker: Diverging Trends in Index Derivatives

Nifty 50 (24,854) lost 0.4 per cent last week whereas Bank Nifty (52,094) appreciated 1.8 per cent. Here, we analyse the futures and options (F&O) data of both indices, and give our trade suggestions.

Nifty 50

Nifty futures (October) (24,949) dropped through last week, and lost 0.4 per cent. It marked an intraweek low of 24,640 on Friday before recovering above the key support of 24,900. Although the contract closed above this level, the trend remains bearish.

The chart shows that Nifty futures confirmed a bear flag pattern on the daily chart. According to this chart set up, the contract can tumble to 23,600. However, there is a strong base at 24,320, and a drop below this level is less likely.

On the other hand, if Nifty futures rally past 25,300, the outlook can turn positive. In such a scenario, it can rise to 25,520 and then potentially to 26,000. That said, as it stands, the price action is bearish.

Supporting the same, the cumulative Open Interest (OI) of Nifty futures has dropped as the price fell, indicating long liquidation. While this is not a solid bearish sign, the chart set up and the Put Call Ratio (PCR) of Nifty options strengthen the bearish case.

The PCR of both weekly and monthly are less than 1 because of the relatively greater number of call option selling. Traders sell calls when they hold bearish expectations.

Strategy: Last week, we suggested going short when Nifty futures slip below 24,900. Traders who initiated this trade can retain it. One can also consider going short afresh now. Maintain the stop-loss for this trade at 25,300.

 When the contract touches 24,550, revise the stop-loss to 24,750. Book profits at 24,320.

Participants who bought put options (we recommended buying 25,000-put of October expiry) can hold on to the trade. Liquidate the contract at the prevailing price when Nifty futures decline to 24,320.

Bank Nifty

Bank Nifty futures (October) (52,310) posted a weekly gain of 1.8 per cent, powered by a strong up-move on Friday. It closed above the important resistance at 52,200, a positive signal.

As the contract moved up, the cumulative OI dropped, denoting short covering. Also, the PCR of weekly options is greater than 1, implying relatively higher number of put option selling. Traders sell puts when their outlook is positive.

While the above factors support a potential rally from the current level. Bank Nifty futures face a resistance at 52,800. Only a clear breach of this level can result in the contract establishing a sustainable rally.

A breakout of 52,800 can take Bank Nifty futures to 54,000-54,500 resistance zone. But if it slips below 52,000 from the current level, it can resume the downtrend where the contract price can decline to 50,500.

Strategy: The next trade should be based on which level Bank Nifty futures breach first. If it surpasses 52,800, consider initiating fresh longs with a stop-loss at 52,200. When the contract touches 53,500, revise the stop-loss to 52,900. Exit at 54,000.

But if Bank Nifty futures slip below 52,000, go short with a stop-loss at 52,500. When the price dips to 51,300, modify the stop-loss to 52,000. Book profits at 51,000.