Nifty may hit 18000 above 17400, use Iron Butterfly for Budget 2022; Bank Nifty may hit 39300 this week

Nifty continues to remain in an uptrend in the medium term, so buying on dips continues to be the preferred strategy

By Rajesh Palviya

Nifty started the week on a flat note and continued its previous week’s bearish momentum throughout the week. Nifty closed at 17102 with a loss of 515 points on a weekly basis. On the weekly chart, the index has formed a long bearish candle forming lower High-Low compared to previous week indicating weakness at current levels. Since the past 3-5 months index is consolidating within 18400-16800 levels indicating short term consolidation. Hence any either side breakout will indicate further direction. The chart pattern suggests that if Nifty crosses and sustains above 17400 level it would witness buying which would lead the index towards 17600-18000 levels. However if index breaks below 17000 level it would witness selling which would take the index towards 16800-16400. Nifty is trading below 20 and 50 day SMA which are important short term moving averages, indicating negative bias in the short to medium term.

Nifty continues to remain in an uptrend in the medium term, so buying on dips continues to be our preferred strategy. For the week, we expect Nifty to trade in the range of 17600-16800 with mixed bias.

The daily and weekly strength indicator RSI is moving downwards and is quoting below its reference line indicating negative bias.

Nifty Derivative Outlook

Nifty futures closed at 17126 on a negative note with 2.91% increase in the open interest indicating Short Build Up. FIIs were sellers in Index Futures to the tune of 1728 crore and were buyers in Index Options to the tune of 3721 crore, buyers in the Stock Futures to the tune of 1245 crore, and net sellers in the derivative segment to the tune of 4574 crore . India VIX index is at 20.72 v / s 21.07. Nifty ATM Call option IV is currently 43.16 whereas Nifty ATM Put option IV is quoting at 17.55.

Index options PCR is at 0.92 v / s 1.09 and F&O Total PCR is at 0.85 Nifty Put options OI distribution shows that 17000 has highest OI concentration followed by 16700 & 16800 which may act as support for current expiry. Nifty Call strike 17500 followed by 17300 witnessed significant OI concentration and may act as resistance for current expiry

Bank Nifty Outlook

Bank Nifty started the week on a positive note and traded with extreme volatility on either side throughout the week. Bank Nifty closed at 37689 with a gain of 116 points on a weekly basis. On the weekly chart the index has formed a “Doji” candlestick formation indicating indecisiveness amongst market participants regarding the direction. The index is moving in a Higher Top and Higher Bottom formation on the daily chart indicating positive bias. The chart pattern suggests that if Bank Nifty crosses and sustains above 38000 level it would witness buying which would lead the index towards 38600-39200 levels. However if index breaks below 37000 level it would witness selling which would take the index towards 36300-36000. Bank Nifty is trading above 20, 50, and 100 day SMAs which are important short term moving averages, indicating positive bias in the short to medium term. Bank Nifty continues to remain in an uptrend in the short term, so buying on dips continues to be our preferred strategy. For the week, we expect Bank Nifty to trade in the range of 39300-37000 with a positive bias.

The weekly strength indicator RSI is in bullish mode and sustaining above 50 mark which supports bullish sentiments ahead.

Bank Nifty Derivative Outlook

Bank Nifty closed at 37824 on negative note with 4.88% increase in open interest indicating Short Build Up. Bank Nifty Put options OI distribution shows that 38000 has highest OI concentration followed by 37500 & 37700 which may act as support for current expiry. Bank Nifty Call strike 38000 followed by 38200 witnessed significant OI concentration and may act as resistance for current expiry.

Sectors, stocks in focus this week

We expect the automobile, banking, sugar, fertilizers, real estate and defense sectors to do well in the near term. One can focus on stocks like State Bank of India (SBI), Canara Bank, Bata India, Maruti Suzuki, Tata Motors, Triveni Engineering, Chambal Fertilizers, Balrampur Chini, DLF, and Brigade.

Nifty Strategy

The strategy which we are suggesting for Union Budget with neutral bias is IRON BUTTERFLY, which involves Selling one lot each of NIFTY 17,100 Call @ 254 & one lot of 17,100 Put @ 241 and Simultaneously, buy one lot of 17,600 Call @ 81 & buy one lot of 16,600 Put @ 73. The assumption for the strategy is that the extrinsic values ​​of both Call & Put options will fall drastically post budget due to fall in volatility & Theta (Time Decay) ultimately leading to gains. Both risk and reward in this strategy are limited and the gains in the strategy will be accrued between two breakeven point ie 17,440 on upside & 16,760 on downside. The maximum loss in the strategy is of Rs 7,950 which will occur if Nifty closes outside either of the BEPs; while the maximum profit of Rs 17,050 will happen if Nifty at 17100. Below is the Pay-Off on the expiry day at various strikes.

(Rajesh Palviya, VP – Research (Head Technical & Derivatives), Axis Securities. Views expressed are the author’s own.)

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