F&O Talk | Markets may expect buying on dips with cool-off in India VIX: Sudeep Shah of SBI Securities

Bulls returned to Dalal Street with full force on Friday, as the Sensex closed over 1,600 points higher, reaching a new all-time high, while the Nifty 50 advanced over 468 points. Both indices successfully erased all losses from June 4.

Nifty50 closed 2.05% or 468.75 points higher on Friday at 23,290 while the 30-component BSE Sensex closed with gains of 2.16% or 1,618.85 at 76,693.40 both ending the day with big green candles.

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Analyst Sudeep Shah, Deputy Vice President and Head of Technical & Derivatives Research, SBI Securities interacted with ET Markets regarding the outlook on Nifty and Bank Nifty along with an index strategy for the upcoming week. Following are the edited excerpts from his chat:

After such a sharp decline on Tuesday, the markets recovered pretty soon. This does not seem to be a common phenomenon. What could be going on in the minds of the traders? How can one read these zigzag movements?

The Nifty index experienced a notably turbulent week, keeping traders on high alert. The excitement began on Monday with a dramatic 3.50% gap-up opening after exit polls predicted a clear majority for the NDA. However, the real action unfolded on election counting day when the Nifty encountered one of its most volatile sessions in recent history due to an unexpected election outcome. The index plummeted nearly 6%, marking its steepest drop since 2020.

Amidst this turbulence, the 200-day EMA provided crucial support, allowing the Nifty to stage a sharp recovery. Over the next three trading sessions, the index rebounded by over 9%. The week was marked by significant volatility, with the Nifty oscillating within a 2,057-point range—the widest since March 2020. Additionally, each trading session saw either a gap-up or a gap-down opening.

Despite the high volatility, the Nifty closed the week with a solid gain of over 3%. However, the weekly chart showed a hanging man-like candlestick pattern, and a negative divergence was observed on the daily timeframe of the 14-period RSI. This negative divergence, where the price makes a higher high while the RSI forms a lower high, suggests that traders should be cautious about building overleveraged positions and chasing prices. Instead, adopting a buy-on-dips strategy for the next few trading sessions is recommended.

Where do you see the markets heading next week?

We believe the zone of 22,930-22,900 is likely to provide cushion in case of any immediate decline. As long as the index is trading above 22,900 level, it is likely to continue its northward journey up to the level of 23,650, followed by 23,850 in the short term. While any sustainable move below the level of 22,900, the index is likely to test the level of 22,650 in the short term.

What does the OI data suggest for nifty & Bank Nifty in the coming week?

Markets have experienced a remarkable recovery from the lows seen on Tuesday. The Nifty has surged more than 2000 points in just four trading sessions, catching option writers off-guard. Currently, there is significant open interest build-up in the 23,500 CE and 23,000 PE. After adjusting for the average premium, the market’s broad range is 22850 on the downside and 23600 on the upside. The market may take a breather, consolidating with a positive bias in the coming week. If the Index breaks through 23,600, we could see further movement towards 24,000.

Nifty is approaching its lifetime highs, but Bank Nifty has not followed suit and has displayed underperformance. Call writers continue to build positions at the 50,000 and 50,500 strikes. This implies that the Index could face resistance in the 50,300-50,500 zone, with support seen around the 49,100 level.

Can one expect that volatility has calmed down now as there is some stability in the political scenario for the country?

The India VIX reached a high of 31.71 during Tuesday’s trading session, followed by a sharp decline of over 45% in just four trading sessions with the uncertainty pertaining to the election results getting over. This significant drop brought the VIX below its 20 & 50-day EMA levels, with these averages starting to edge lower. Additionally, the rising slopes of the 100 & 200-day EMAs have slowed considerably.

This trend indicates a substantial decrease in overall market volatility & Looking ahead, India VIX is expected to test its 200-day EMA level, currently at 14.83, in the next few trading sessions.

What do the PCR data indicate for Nifty & bank nifty?

The Nifty’s weekly Put-Call Ratio (PCR) currently stands at 1.10, while the monthly PCR is at 1.10. This indicates an equal tussle between option writers in Nifty, suggesting that the markets may consolidate in the coming week following the recent sharp run-up.

In the case of Banknifty, the weekly PCR is at 0.7, implying the possibility of resistance at higher levels.

The PCR which is used as a contra-indicator is a useful derivative tool, especially when there is extreme call or put writing in the system—specifically, when the PCR approaches 1.5 on the upside or 0.5 on the downside.

What do the current FII and DII stats suggest about the markets?

Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI) have a much larger playing field compared to Domestic Institutional Investors (DII). Sensing the uncertainty related to the general elections, FIIs have sold ₹1,44,640 crore since the start of the calendar year. Meanwhile, DIIs have countered this, negating the negative impact by purchasing to the tune of ₹2,15,220 crore. India has been the second-best performing major market after the US. If FIIs decide to deploy even a fraction of their capital, considering that concerns about political stability have diminished, we could potentially continue to scale new lifetime highs in the market in the coming weeks.

From 1st May till date, FIIs have sold to the tune of 55936 cr while DIIs brought to the tune of Rs 61,300 cr.

Also, FIIs’ Long short ratio for index futures is at 29.6%.

Do you recommend any stocks for the upcoming week that might be technically well placed for the traders?
TECHM: Nifty IT has strongly outperformed frontline indices in the last week. The stock of Tech Mahindra has given a downward sloping trendline breakout on a daily scale. This breakout was confirmed by robust volume. In addition, it has formed a sizable bullish candle on the breakout bar. The momentum indicators and oscillators also support the overall bullish chart structure. These technical factors indicate strong momentum in stock. In the short term, it is likely to test the level of 1430, followed by 1460 in the short term. While, on the downside, the zone of 1340-1335 is likely to provide cushion in case of any immediate decline.

TATASTEEL: The stock has given a horizontal trendline breakout on a daily scale. This breakout was confirmed by robust volume. Currently, the stock is trading above its short and long-term moving averages. These averages are in rising trajectory, and they are in the desired sequence, which suggests the trend is strong. The daily RSI is about to cross the 60 mark on a daily scale. Going ahead, it is likely to test the level of 188, followed by 195 levels in the short term. While, on the downside, the zone of 174-173 is likely to act as immediate support for the stock.

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

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