Nifty 50 (23,432) and Bank Nifty (48,734) depreciated 2.4 per cent and 4.4 per cent respectively last week, quelling the hopes of a recovery. Bank Nifty appears weaker than Nifty 50 after it breached a crucial support last week. Here is an analysis of derivatives data of both indices.

Nifty 50

Nifty futures (January) (23,501) lost 2.5 per cent over the past week. The bears have been gaining traction in the last two weeks. While Nifty futures dropped from 23,993 on Dec 27 to 23,501 on Jan 10, the cumulative Open Interest (OI) increased from 127 lakh contracts to nearly 159 lakh contracts. This denotes that fresh short positions have been coming in since December 27.

While the Put Call Ratio (PCR) of January monthly options is now at 1.1, the same for the weekly options is 0.7. A ratio of less than 1 is because of a higher number of call option selling, which is a bearish indication. 

Like futures and options (F&O) data, the chart of Nifty futures, too, is bearish. In the near term, the contract is likely to drop to area between 23,000 and 22,900. The region between these two levels is a demand zone, possibly aiding in a rebound.

In case Nifty futures rallies from the current level of 23,500, it will face resistance between 23,850 and 24,000. For it to turn the outlook bullish, it should break out of a higher resistance level of 24,350. 

Strategy: Sell Nifty futures at current market level of 23,501. Add more short position at 23,750. Place a stop-loss at 23,925. When the contract touches 23,250, trail the stop-loss down to 23,550. Tighten the stop-loss further to 23,250 when the contract touches 23,100. Book profits at 23,000.

Alternatively, one can buy put options. We suggest going long on Jan expiry 23500-put, whose premium stood at ₹309 on Friday. Buy this contract at ₹275 and on a dip to ₹200. Keep a stop-loss at ₹125. When the price rises to ₹380, alter the stop-loss to ₹275. Move the stop-loss to ₹380 when the premium hits ₹480. Liquidate at ₹580.

Bank Nifty

Bank Nifty futures (January) (48,886) slipped 4.6 per cent last week. Like in Nifty futures, Bank Nifty futures has been witnessing short build-up in the last couple of weeks. The price of the January contract declined from 51,724 on December 27 to 48,886 on January 10. During this period, the cumulative OI shot up from nearly 23 lakh contracts to about 34 lakh contracts.

In line with this, the options, too, give a bearish inclination as the PCR of January monthly options of Bank Nifty is currently at 0.6, showing that the number of call options sold is nearly double that of put options.

Importantly, Bank Nifty futures has now slipped below a key support of 50,000, which only adds fuel to the bearish fire. Although Bank Nifty futures may see a minor rally from the current level of 48,886, possibly to 50,000, it will eventually resume the downtrend.

While 48,000 can offer some support, given the current downward momentum, we anticipate a fall towards the support band of 46,400-46,000.

On the other hand, if Bank Nifty futures surpass 50,000, it can provide some temporary relief. However, only a decisive breakout of 51,000 can turn the short-term outlook positive. For the medium-term trend to become bullish, the contract should top 54,000. 

Strategy: Sell Bank Nifty futures now at 48,886 and on a rise to 50,000. Keep initial stop-loss at 51,250. When the contract touches 47,800, trail the stop-loss down to 49,800. Tighten the stop-loss further to 48,500 when the contract touches 46,900. Book profits at 46,400.

Instead, one can buy puts. Go long on Jan expiry 50000-put, whose premium stood at ₹1,480.80 on Friday. Buy this contract at ₹1,400 and on a dip to ₹950. Keep a stop-loss at ₹500. When the price rises to ₹2,500, alter the stop-loss to ₹1,200. Raise the stop-loss to ₹2,000 when the premium hits ₹3,000. Book profits at ₹3,500.