For Nifty uptrend, 21,850 to play a crucial role. What's your post-budget blueprint?

Expert explains strategy to play in Nifty

The Nifty 50 had a volatile trade on the budget day, but faced resistance at 21,850 before ending the session with moderate gains on February 1. The index also negated lower highs, lower lows formation this week and almost made higher highs, higher lows formation on the daily charts, though there was a bearish candlestick pattern formation. The index was down 28 points to 21,698.

Even the volatility dropped sharply after the passing of two key events namely, the budget and the FOMC meet. The India VIX, which measures the expected volatility for next 3o days in the Nifty 50, fell nearly 10 percent to 14.46 from 16 mark, which may give support to the bulls in the coming days.

Thus, in the coming sessions, if the Nifty 50 manages to surpass the 21,850 area and sustain above the same, then there could be a possibility of index filling the downside gap created on January 17. If it comes true, then the rally beyond 22,000 can't be ruled out, while 21,500 is the key to watch on the support front, experts said.

The index held 10-day and 21-day EMA in the past couple of sessions, and with this, it traded above all key moving averages, which is a positive sign.

"The Nifty on the Budget day did not result into any major directional move on either side. The index has an important resistance near 21,840 levels which it is failing to break after many attempts and short term support is now near 21,620 levels," Ashish Kyal, CMT, founder and CEO of Waves Strategy Advisors, said.

Trading strategy for Nifty 50

Over near term, Kyal expects rangebound movement between 21,840 and 21,420 for the Nifty 50. A break in this range can provide trading opportunity in that direction.

According to Ashwin Ramani, derivative analyst at Samco Securities, the level of 21,800 on the upside and the level of 21,500 on the downside will be the two key levels for the Nifty.

The implied volatility percentile (IVP) of the Nifty is 88 percent. The implied volatility (IV) of the Nifty is 14. The IVP of 88 percent indicates that 88 percent of the times in the last one year, the IV of Nifty traded below 14 and only 12 percent of the times in the last one year the IV of Nifty traded above 14.

"We can interpret that the current IV of Nifty, which is 14, is at the higher range of the historical volatility. It has been seen in the past that volatility rises before the budget and cools off post the budget announcement. Since the IV of Nifty is at the higher range of historical volatility, chances are that volatility can cool off in the coming days," Ramani said.

In this backdrop and in order to take advantage of the current market situation, one can deploy an Iron Butterfly strategy in Nifty.

While explaining strategy, he advised buying one lot of 22,400 Call option around 11 and buying one lot of 21,000 Put option around 18 and hedging the same by selling 1 lot of 21,700 Call option around 165 and selling 1 lot of 21,700 Put option around 172, with weekly expiry of February 8.

He feels the maximum profit in the strategy is capped at Rs 15,271 while the maximum loss is capped at Rs 19,612.

The strategy has a probability of profit (POP) of 63 percent and the breakeven for this strategy is 21,392-22,008. Meaning, "the strategy will result in profit as long as Nifty trades inside the breakeven range while the strategy will start losing money if the index breaks out sharply on either side of the range," he explained.

He says the capital required to deploy the Iron Butterfly strategy in Nifty is 70,000. "It is advisable to exit the strategy if Nifty moves out the 21,392-22,008 breakeven range."

Bank Nifty

The Bank Nifty had a good day despite volatility in the market and closed above 46,000 mark, thanks to the rally in PSU banks post budget. The index has formed Doji kind of candlestick pattern on the daily charts, and climbed 192 points to 46,189.

Ashish Kyal said the Bank Nifty has major hurdle near 46,600 levels and support at 45,650 near the low created on budget day. Bank Nifty is underperforming Nifty as of now.

He feels the breach above 46,600 is must for a positive trend in the index for move to 47,200 with support of 45,650 levels. Hourly close below 45,650 level will take prices to 45,200 levels.

Trading strategy for the day can be creating long positions in Bank Nifty futures above 46,700 for a move to 47,200, he said.

After the rally led by PSU banks on budget day, Om Mehra, technical analyst at SAMCO Securities feels, iIn the coming session, there is an expectation that private banking stocks could outperform.

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