Initiate #39;Bull Call Spread#39; in Nifty and Bank Nifty: Chandan Taparia
Nifty had a volatile session as it bounced back sharply from lower levels and recovered more than 100 points from intraday lows of 10,628. It formed a Hammer candle on a daily scale followed by Bearish Engulfing body on a weekly scale that indicates bulls and bears are having a tug of war.
Formation of Hammer on the daily chart suggests a bounceback move whereas formation of Bearish candle on the weekly scale suggests multiple barriers at higher zones.
It has been making lower highs, lower lows from last three trading sessions and needs to negate the same by holding above 10,750-10,777 zone to witness a short-term bounce towards 10,850 and then 10,929-10,985 zone. On the downside, immediate supports exist in the 10,650-10,600 zone.
Nifty has been forming alternative positive and negative weekly close from last eight weeks and got stuck in a broader trading range in between 10,450 and 10,985. Hence, it requires a decisive range breakout to commence the next leg of the rally.
India VIX moved up 5.83 percent at 16.16 in the last week but now finding barrier at a lower hurdle of 17.5. VIX needs to hold and cool down below 16 for Nifty to surpass 10,985 else it could get stuck in a range with volatile swings on both the side.
On the options front, maximum Put OI is at 10,500 followed by 10,000 strikes whereas maximum Call OI is at 11,000 followed by 11,500 strikes. Derivatives setup suggests that support of 10,600-10,650 could provide comfort to bulls but intact Call writing at 11,000 strike is going to restrict its momentum.
Bank Nifty has been holding the strength compared to Nifty and declines are being bought near 27,000. It has been holding above its 50-DEMA and supports are gradually shifting higher. It has formed a bullish candle on the daily scale followed by Doji candle on the weekly scale which indicates that follow up is required at higher zones for a fresh range breakout.
Now, it has to hold above 26,950-27,000 to extend its gains towards 27,350 then 27,500-27,750. On the downside, supports are placed at 26,850 and then at 26,666.
We observe positive price set up in most of the Private and PSU banks including ICICI Bank, Yes Bank, DCB Bank, PNB, Bank India, Federal Bank, IDFC Bank etc. while other stocks like IGL, Marico, Delta Corp, Escorts, LIC Housing could continue to show their strength.
Bank Nifty is showing more strength whereas Nifty is showing rangebound trend with a positive bias so traders can deploy Bull Call Spread for both indices. Or, in Bank Nifty, one can buy 27,300 Call to play the positive momentum to head towards 27,500.
Disclosure: Motilal Oswal Financial Services Ltd (MOFSL), the spokesperson or his relatives, do not have financial interest in the securities mentioned above. The spokesperson has not served as a director, employee or officer at the subject company in the last 12 months. MOFSL or its associate might be involved in market making for the subject company or have potential conflict of interest.
The author is Associate Vice President, Analyst-Derivatives at Motilal Oswal Securities.
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