Chartist Talks: Deploy bull call spread strategy in Nifty; 2 stocks look strong, says Sudeep Shah of SBI Securities

Despite the volatility surrounding the union budget, the benchmark index Nifty has continued its winning streak for the eighth consecutive week. After the budget, the Nifty has witnessed a minor throwback. The throwback halted near its 20-day EMA (exponential moving average) level, where the index has formed a Bullish Hammer kind of pattern. Thereafter, the index resumed its northward journey.

It ended the week near an all-time high level and formed a bullish candle with a lower shadow. Most noteworthy, the daily RSI (relative strength index) has found support near the 60 level and witnessed a sharp rebound, which is a classical bullish sign as per RSI range shift theory.

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Our view on the market stays bullish considering the current weekly and daily chart structure. At the same time, we would say that it would be a stockpicker's market. Hence, don’t go too much by intraday action. Look at the bigger picture. More importantly, follow the concept of Dow Theory, which says that if an index or a stock is marking higher highs and higher lows, stay with it irrespective of any scary news flow. That’s because price action is the best testimony of a trend.

Talking about levels, the 24,500-24,450 zone  will act as immediate support for the index. As long as the index is trading above 24,450, it is likely to test the level of 25,200, followed by 25,450 in the short term. On the downside, if the index slips below 24,400, then the next support is at the 24,200-24,150 level.

Over the past 17 years, the month of August has often exhibited a mixed trend for the Nifty. On eight occasions, the index has concluded on a positive note with an average gain of 3.73 percent, while on 9 occasions, it has ended on a negative note with an average loss of 4.45 percent. Overall, average returns for the August series have been -0.60 percent for the Nifty. Over the past 17 years, August has consistently shown an average volatility of over 7.66 percent for the Nifty.

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Is the Bank Nifty looking oversold?

Yes, according to RSI range shift rules, when an index or stock is in a bullish zone, the 40 level on the RSI will act as the oversold region for that index or stock. Recently, the RSI has touched 40. On Friday, we saw a strong rebound in Bank Nifty. It has found support near  the 38.2 percent Fibonacci retracement level of its prior upward rally (46,077-53,357) and surged above its 50-day EMA level.

We believe the Bank Nifty is likely to witness a pullback rally in the short term. The zone of 50,500-50,400 will be the crucial support for the index. As long as the index is trading above 50,400, it is likely to test the level of 52,000, followed by 52,500 in the short term.

What do the sectoral rollovers indicate?

Per rollover data, Nifty Pharma, Nifty Healthcare, Nifty IT, Nifty Auto, Nifty Oil & Gas, Nifty FMCG, and Nifty CPSE are likely to outperform the frontline indices.

What should be the technical and options strategy for the Nifty and Bank Nifty for next week?

We feel the Bank Nifty could still continue its consolidation for the coming week, and Nifty looks stronger among the two. Hence, we recommend deploying a Bull Call Spread in Nifty by buying 24,900 strike Call at Rs 122, and selling 25,050 strike Call at Rs 60. The maximum risk (outflow) in the above strategy would be 62 points in case the Nifty settles below 24,900 on the weekly expiry day. Maximum profitability in this strategy could be 88 points on a close above 25,050 levels.

Which is the one sector that can emerge as a strong performer in the coming months?

We believe Nifty Auto is likely to outperform in the short-term as we have seen falling channel breakout  on a weekly scale. As the index is trading at an all-time high, all the moving averages and momentum-based indicators are suggesting strong bullish momentum in the index. The daily RSI has shown a downward sloping trendline breakout on a daily scale.

Per the measure rule, the index is likely to test the 27,200 level  in the short term.

Which are the two stocks that look strong on the charts?

Balkrishna Industries

The stock has formed a strong base near the 50-day EMA level and seen a 22-day consolidation breakout on the daily scale. This breakout is confirmed by robust volume. In addition, it has formed a sizeable bullish candle on the daily scale, which adds strength to the breakout. Going ahead, it is likely to test the level of Rs 3,450, followed by Rs 3,540 in the short term. On the downside, the zone of Rs 3,200-3,180 will act as crucial support for the stock.

Ashok Leyland

The stock has seen a stage-2 cup pattern breakout on the daily scale, along with robust volume. The daily RSI has surged above the 60 mark, and rising. Going ahead, it is likely to test the level of Rs 258, followed by Rs 265 in the short term. On the downside, the zone of Rs 238-237 will act as  crucial support for the stock.

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