F&O Tracker: Price Action Indicates Rally Extension

Nifty 50 (22,502) and Bank Nifty (48,200) made a recovery and appreciated 2 per cent and 1.6 per cent respectively last week. The positioning of derivative participants has now turned positive for both indices. Here is an analysis.

Nifty 50

Nifty futures (May expiry) (22,540) rebounded on the back of a support and rallied. It gained 1.8 per cent over the past week. As the contract advanced, the cumulative Open Interest (OI) of the futures contracts increased – it went up to 153.7 lakh contracts on May 18 versus 149.6 lakh contracts on May 10. This indicates long build-up.

The chart shows that Nifty futures has surpassed an important level of 22,500 and thus, the outlook has turned positive. The nearest resistance level is at 22,750, followed by 22,850. Given the prevailing chart set-up, the contract is likely to move towards these levels.

Supporting the bullish inclination, the Put Call Ratio (PCR) of weekly and monthly options stood at 1.3 and 1.1 respectively on Saturday. A ratio above 1 implies selling of a relatively higher number of put options compared with call options. Traders sell put options when they have a bullish outlook.

So, overall, the inclination is clearly bullish, and participants can consider taking long positions.

Strategy: Buy Nifty futures now at 22,540. Add longs in case the contract dips to 22,350. Place initial stop-loss at 22,280. When the contract touches 22,750, raise the stop-loss to 22,600. Book profits at 22,850.

Alternatively, traders can go long on call options. Our suggestion would be to buy a 22500-strike monthly call option, which closed at ₹222 on Friday. Accumulate if the premium dips to ₹150. Exit this option at the going rate when Nifty futures hits 22,850.

Bank Nifty

Bank Nifty futures (May expiry) (48,281) appreciated 1.4 per cent last week as the support helped the bulls to regain traction. The upswing was accompanied by an increase in cumulative OI of Bank Nifty futures – it went up to 29 lakh contracts on May 18 as against 27.6 lakh contracts on May 10. This shows long build-up.

But the PCR of options is not bullish. While the PCR of weekly options is at 1, the same of monthly options is at 0.8. A ratio less than 1 is because of higher call option writing, a bearish signal.

That said, the chart of Bank Nifty futures gives hope for the bulls by closing above a resistance at 48,200. Although there could be a minor decline from here, Bank Nifty futures is eventually expected to recover and move up to 49,250 or even to 49,600.

Strategy: Go long on Bank Nifty futures at the current level of 48,280. Add longs if the contract moderates to 47,900. Place initial stop-loss at 47,400. When the contract rallies above 48,800, tighten the stop-loss to 47,800. When it rises past 49,250, raise the stop-loss to 48,000. Book profits at 49,500.

Instead of buying Bank Nifty futures, one can consider going long on the call option. We suggest buying the 48,000-strike call option of the May monthly series. Accumulate when Bank Nifty futures soften to 47,900. Liquidate the option at the going price when Bank Nifty futures hits 49,500.