Trading Plan: Record high likely on Nifty, Bank Nifty Monday if gap up opening held; apply strangle strategy

Market Uptrend

Traders and technical analysts are betting on the Nifty hitting a record high on Monday after exit polls predicted a convincing win for the NDA coalition in the general elections. The record high for Nifty is 23,110, around 580 points away from Friday’s closing level of 22,531.

The market is expected to open with a gap on the upside and players see two factors pushing it higher: short covering of index futures positions by foreign investors and fresh buying from retail investors.

The general view is that valuations are expensive at current levels, but technical factors and sentiment will be the driving forces over the next few sessions. Fund managers and portfolio management services (PMS) funds sitting on cash are likely to deploy a good part of it to avoid underperformance in a rising market. Retail money on the sidelines too is expecting to flow in, mostly in small and midcap stocks.

Nifty Outlook and Strategy

Ashish Kyal, CMT, Founder / CEO of Waves Strategy Advisors

The Nifty will see a gap-up opening post the exit polls outcome. As per options data, 22,500 Put options are still showing high activity, suggesting this level will remain as important support. There has been short buildup near 23,000 and 23,500 Call options. It will be important to see if, after the gap-up opening, the Call sellers start panicking and cover their short positions, as that will further add to the upside move.

Overall outlook looks positive, but the candle close at 10:15 am, which is an hourly candle, is going to be important.

Key Resistance: 23,000, 23,290

Key Support: 22,420

Strategy: If the Nifty manages to sustain the gap until 10:15 am, then long positions can be created with a spread on options: buying the 22,600 strike Call and selling the 23,300 strike Call until the expiry, with the stop-loss as per spot levels of 22,420 and an expected upside move to 23,290 levels.

Chandan Taparia, Senior Vice President | Analyst-Derivatives at Motilal Oswal Financial Services

The Nifty is likely to see a 300-400-point gap-up opening on Monday. The index, holding above the 22,650 level, could move towards 23,000, 23,110, and 23,500 zones, while on the downside, major support shifts to 22,400 and 22,222 zones. FIIs’ index long-short ratio fell sharply to 13 percent, which is a recent low, and any recovery from here as per historical data could trigger a short covering move and a fresh leg of rally in the Indian market.

Key Resistance: 23,110, 23,500

Key Support: 22,400, 22,222

Strategy: Buy Nifty with stop-loss of 22,400, for target of 23,110 and 23,500 levels

Milan Vaishnav, CMT, MSTA, founder of Gemstone Equity Research & Advisory Services

The markets are likely to see a strong opening and may even extend gains on Tuesday, the day of results. It is important to note that during such strong reactions to external events, the markets tend to defy technical levels on either side. From a technical perspective, there are both possibilities of the markets reacting positively with a gap and extending their gains the next day, and also subsequently seeing profit-taking from higher levels.

The options open interest data for Nifty's June 6 expiry shows the best and worst-case scenarios of the Nifty swinging 600 points on either side.

Strategy: To play such a setup, one can adopt a Strangle strategy of selling the 23,500 strike Call and selling the 21,700 strike Put of June 6 expiry and realize a decent yield on the capital. A Strangle strategy involves buying or selling out-of-the-money Call and Put strikes with the same expiry date.

Bank Nifty - Outlook and Positioning

Ashish Kyal, CMT, Founder / CEO of Waves Strategy Advisors

We can expect a gap-up opening in Bank Nifty as well, in line with the broader market, and it will be important to see if the same is sustained until 10:15 am. The index retraced nearly 50 percent of the prior rise and closed at important Fibonacci support levels. Long positions can be created in this index in view of the positive election outcome after 10:15 am if the gap remains unfilled. Price action post-opening is important to watch. We can see some hurdle near the 50,000 level as per options data, but the same can be breached. Dips can be used as buying opportunities for a move to 50,600 levels.

Key Resistance: 50,600, 52,000

Key Support: 48,500

Strategy: Long positions can be created in Bank Nifty after 10:15 am if the gap is sustained for a move to 50,600, followed by 52,000 levels.

Milan Vaishnav, CMT, MSTA, founder of Gemstone Equity Research & Advisory Services

Even the Bank Nifty is likely to see a strong opening and may even extend its gains on Tuesday, the day of results.

Strategy: One can adopt a similar Strangle strategy by selling the 50,500 strike Call and the 46,500 strike Put for June 5 expiry.

Chandan Taparia, Senior Vice President | Analyst-Derivatives at Motilal Oswal Financial Services

The Bank Nifty is likely to mirror a similar trend of a gap-up opening. Price observation of the last couple of weeks suggests a major shift of support near 47,777 zones to hold any sort of market volatility, if it happens. While a decisive hold above 49,250 zones could commence the next leg of the rally towards 50,000-50,550 zones.

Key Resistance: 50,000, 50,550

Key Support: 48,500, 48,250

Strategy: Buy Bank Nifty with a stop-loss of 48,500, for a target of 50,000 and 50,550 levels.

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