Chartist Talks: Sudeep Shah advises Bull Call Spread strategy for Nifty next week, picks these 2 largecaps

Considering the struggle at 22,800, is it looking difficult for Nifty to surpass the 23,000-mark next week?

The Nifty 50 post marking a fresh life high of 22,794 on May 3, 2024 has witnessed sharp profit taking to the tune of almost 450 points from higher levels amidst India VIX rising to 15 levels on the upside. The Index has made 4 attempts to cross 22,800 in the past 16 sessions, but has witnessed profit booking from higher levels on all instances. This suggests a formation of strong resistance around the 22,800 zone in addition to a Bearish Engulfing candlestick pattern being formed at higher levels.

Nifty also witnessed bearish divergence on daily timeframe with the momentum indicator RSI (relative strength index) failing to surpass its previous swing high despite indices surging to a fresh high on Friday.

While it is important to be slightly cautious on account of the overhead resistance being formed, it is equally important to note that despite all these bearish indications, index is still managing to hold its 50 DMA zone of 22,280-22,300 which is also the lower support zone of the upward rising channel Nifty, which has has been trading since January 2024.

With the global markets on a rebound mode post the US Fed Policy announcement, we feel Nifty could continue consolidating between 22,280 on the downside and 22,800 levels on the upside in the coming week. Any move beyond 22,800 zone could imply continuation of the rally upto 23,050-23,200 levels, which is the upper end of the rising channel mentioned earlier. Below 22,280, the index could witness acceleration of profit booking upto 22,000-21,900 levels.

Additionally, the weakening of the dollar index upto 104.80-105 levels along with Brent crude oil prices stabilising at $83-84 per barrel is a positive trigger from an Indian market perspective.

Also, what is the F&O data saying about Nifty direction? Are you getting any strong signals about a trend?

While Long Unwinding was visible in Nifty Futures post Friday's steep sell-off, on the options front, strong Put writing was visible in 22,500 & 22,200 strikes despite the fall, which implies 22,280-22,350 could act as a strong support. While significant Call writing visible in 22,500-22,600-22,700 strikes implies 22,730-22,800 zone could act as a strong resistance. Nifty's monthly PCR (Put Call ratio) at 1.3 implies that buying support is likely at lower levels.

What is the F&O trading strategy you want to use for Nifty and Bank Nifty next week?

As we expect Nifty to take support and rebound from lower levels, to capitalise this potential move on the upside with limited risk-reward ratio, we suggest traders could attempt a Bull Call Spread strategy, which involves buying 22,500 Call at Rs 137 and selling 22,700 Call at Rs 63 with outflow of 74 points (maximum loss capped at Rs 1,850) and a potential profit of 126 points (Rs 4,926). We recommend keeping stop-loss at 22,280 for this Bull Spread.

Bank Nifty, which has been outperforming in the recent past, has strong supports at its 20-day EMA (exponential moving average) zone at 48,350-48,400 and till this zone holds, we expect indices to continue inching higher towards 49,600 and 49,850 amidst some consolidation.

Bull Call Spread strategy involves buying in-the-money (ITM) Call and selling out-of-the-money (OTM) Call option with same expiry date, when one has a moderately bullish view.

Few sectors where you feel the momentum could be favourable in the coming week?

In terms of outperformance within the sectoral indices, auto, energy, CPSE, metals as well as PSU banks look stronger from a relative strength perspective with their ratio charts marking new highs in comparison to Nifty50, while the IT and Media space could continue its underperformance going forward too.

Which 2 stocks can give an opportunity for making money in the upcoming week?

Coal India

Coal India has been experiencing a robust uptrend since September 2023, consistently trading above its key short- and long-term moving averages. After reaching an all-time high in February 2024, the stock underwent profit booking and entered a consolidation phase. However, following its Q4 result announcement, the stock broke out with strong volumes (highest since September 7, 2023).

Additionally, the momentum indicator RSI has surged above 60, indicating further momentum in the stock. With a strong undercurrent in most PSE names, we anticipate Coal India to continue witnessing this positive momentum in the upcoming week and gradually approach Rs 500-515 level. The stock can be bought with a stop-loss at Rs 455 levels.

Mahindra and Mahindra

Post the monthly auto sales numbers, strong outperformance has been witnessed in the entire space led by M&M, which has ended the week at an all-time high level outperforming against other Nifty heavy-weights. Also, the market's response to the company's recent product launches has been favourable.

Notably, a strong Bullish Engulfing kind of candlestick pattern has formed on the weekly timeframe with the stock sustaining above all its key short- to medium-term moving averages, signaling robust momentum in the stock. With the momentum indicator RSI sustaining above 70 along with consistently high delivery volumes witnessed over the past month, we recommend buying the stock with a target price of Rs 2,280-2,340 with a stop-loss at Rs 2,080 levels.

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