F&O Talk: Nifty to consolidate further, says Sudeep Shah; picks 3 stocks for next week

The Indian stock market extended gains on Friday, although Middle East uncertainties capped gains for the benchmark indices Sensex and Nifty which closed only marginally higher.

Sensex gained over 3 points to close at around 77,541 while Nifty 50 rose 20 points to end the session at 24,252. Broader markets performed better, with Nifty Smallcap 100 rising 0.6%.

Analyst Sudeep Shah, Vice President and Head of Technical & Derivatives Research at SBI Securities, interacted with ETMarkets regarding the outlook for the Nifty IT, options data as well as an index strategy for the upcoming week. The following are the edited excerpts from the chat:

1.) Sensex, Nifty have fallen in 4 out of 5 sessions. What does next week's set up look like?

Since the beginning of August, the benchmark index Nifty has been gradually drifting lower. After marking a low of 24,025, the index witnessed a minor pullback; however, it ended lower for the second consecutive week. On the weekly chart, the index has formed a small-bodied candle with a minor lower shadow, reflecting a lack of strong directional conviction.

An interesting pattern has emerged during August. The index has largely witnessed momentum during the first hour of trading, only to slip into consolidation thereafter. The repeated formation of small-bodied candles further highlights the absence of strong commitment from both bulls and bears. The question now is: who will make the first decisive move?

Technically, the index is currently oscillating around its crucial moving averages, which are largely flat. Momentum indicators and oscillators are also pointing towards a sideways phase. The daily RSI remains in a sideways zone, while the trend-strength indicator, daily ADX, is placed at 12.80 and continues to remain flat. And when the trend indicators go quiet, the next signal often becomes even more important.

Going ahead, the 24,350-24,400 zone will act as a crucial hurdle for the index. On the downside, 24,050-24,000 will remain an important support zone. A decisive move beyond this range could determine whether Nifty is ready for its next big move or another round of consolidation awaits.

Sensex: The benchmark index registered a recent high of 79,143 on August 04, following which it entered a phase of gradual correction. However, on Wednesday, the index found support near the lower trendline of its rising channel and witnessed a mild pullback. Despite the recovery attempt, Sensex ended the week around the 77,500 mark, down 0.60%, while forming a small-bodied candle with a lower shadow.

From a technical standpoint, the index continues to hover around its 20-day, 50-day, and 100-day EMAs. The flattening of these key moving averages suggests a lack of directional bias and points towards a consolidative market structure. Additionally, the daily RSI has remained range-bound over the last ten trading sessions, reinforcing the ongoing sideways trend. The ADX is currently placed at 13.53, highlighting weak trend strength and the absence of any strong momentum in either direction.

Looking ahead, the 77,900-78,000 zone is expected to act as an immediate resistance area. A decisive and sustained breakout above 78000 could trigger renewed buying interest, paving the way for an advance towards 78700, followed by 79300.

On the downside, the 77,000-76,800 zone remains a crucial support band. As long as the index holds above this range, the broader consolidation is likely to continue. However, a breach below these levels could invite further weakness in the near term.

2.) Where are you seeing the derivatives positioning right now, and which Nifty strikes could act as the immediate support and resistance zones going into the next expiry?

Nifty has maintained a higher high–higher low structure since the low of 22,183 recorded on April 2, although the broader movement has remained confined within a range.

A rising trendline connecting the lows of 22,183 on April 2 and 23,072 on June 11, when extended further, provided support to Nifty around 23,606. The index bounced sharply from this trendline and subsequently rallied nearly 5%.

After hitting a high of 24,774 on August 3, which coincided with the first day of the new CAS settlement system, Nifty remained under pressure and failed to close above the previous session’s high for 12 consecutive sessions — its longest such streak in recent history. However, the index has now broken this streak after finding support around the rising trendline in the 24,020–24,000 zone.

Importantly, this trendline support coincides with the 61.8% Fibonacci retracement of the previous upmove from 23,606 to 24,774, making the 24,020–24,000 zone a crucial support area.

Historical evidence also provides some encouragement. A study of the previous three comparable nine-session losing streaks — November 15–25, 2011; August 24–September 5, 2012; and December 5–17, 2012 — shows that Nifty delivered positive returns over the subsequent one-week, one-month and three-month periods. The average gains during these periods stood at 4.32%, 5.36% and 12.27%, respectively.

The derivatives setup further reinforces the importance of 24,000. Put open interest at the 24,000 strike is nearly three times the Call open interest, highlighting strong support around this level. Hence, 24,000 remains a key near-term level to watch. A decisive breach below this zone could trigger fresh selling pressure.

On the upside, 24,500 is the key hurdle, with Call open interest around 3.5 times the Put open interest. A decisive move above 24,500 could trigger short covering and potentially accelerate the upward momentum.

3.) With crude, geopolitical risks and global bond yields all elevated, what is the biggest risk that the options market may be underpricing right now?

The options market could be underpricing tail risk at current levels. IV is around 11, while IVP is near 17, suggesting implied volatility is towards the lower end of its historical range. At the same time, the intraday range has remained compressed since the beginning of August, making it difficult for traders to find meaningful momentum or directional opportunities. This prolonged compression may be creating a sense of complacency in the options market. The key risk is a low-probability but high-impact event, be it geopolitical, macro, a sharp move in crude or in bond yields that suddenly expands the trading range and triggers a spike in volatility. Such a move could catch option sellers off guard, particularly those carrying short-gamma exposure. So, the risk is not just direction, but a sudden repricing of tail risk and volatility.

4.) What are key levels to track for Nifty Bank and Nifty IT?

The banking benchmark, Bank Nifty, has remained in a prolonged consolidation phase over the last 48 trading sessions, trading within a broad range of 58,706-56,023. More recently, the consolidation has tightened further, with the index confined to a narrow 721-point range over the past 13 trading sessions, reflecting a clear lack of directional conviction.

This subdued price action has resulted in the formation of a Bollinger Band Squeeze on the daily chart, a pattern that develops when volatility contracts sharply and the Bollinger Bands narrow significantly. Historically, such phases of compressed volatility are often followed by a strong directional move, making the current setup important from a trading perspective.

Momentum indicators also continue to support the consolidation view. The Daily RSI and Stochastic Oscillator have been moving sideways, indicating the absence of any meaningful bullish or bearish momentum. At the same time, the Average Directional Index (ADX) has slipped to 8.06, its lowest reading since inception, highlighting an extremely weak trend environment.

Going forward, the 58,000-58,200 zone is likely to act as a critical resistance band. A decisive and sustained breakout above this hurdle could trigger a fresh uptrend and lead to a sharp expansion in volatility. On the downside, the 57,200-57,000 zone remains a key support area. A breach below this range may signal the start of a corrective phase.

Overall, Bank Nifty appears to be in the final stages of consolidation, and a convincing move beyond either 58200 on the upside or 57,000 on the downside could mark the beginning of the next trending move in the index.

For Nifty IT, the zone of 30,200-30,000 will act as important support. On the upside, the 200-day EMA zone of 31,600-31,800 will act as a crucial hurdle.

5.) For traders looking beyond the index, which 2-3 stocks currently offer the clearest risk-reward setup in the F&O segment, and what are the levels or triggers that would make you take those trades?

The three stocks that offer the cleanest risk-reward setups in the F&O segment are AU Small Finance Bank, Aditya Birla Capital, and Nippon Life India Asset Management.

AU Small Finance Bank has been consolidating in the Rs 431–384 range for the past eight weeks. Despite the consolidation, the stock continues to trade above its key moving averages, while the rising ADX indicates a gradual buildup in trend strength. A decisive breakout above Rs 431 could trigger the next directional move, with the Rs 385–380 zone acting as an immediate support area.

Aditya Birla Capital hit an all-time high of Rs 1,108 before closing marginally lower on the daily timeframe. The stock has faced strong resistance in the Rs 1,080–1,100 zone, which it has failed to decisively cross multiple times since late April. On the downside, the 20-day EMA has consistently acted as dynamic support, keeping the broader bullish trend intact.

The rising ADX points towards a gradual strengthening of the trend, while the RSI remains above 60 on both the daily and weekly timeframes, indicating sustained bullish momentum. As long as the stock is able to sustain above the Rs 1,100-1,080 zone, the stock is likely to extend its up move.

Nippon Life India Asset Management has given a breakout from a downward-sloping trendline on the daily timeframe, signalling a potential shift in trend. The stock has repeatedly found strong support near its 34-day EMA, which has acted as a reliable dynamic support since August 7. It is now trading above its key short- and long-term moving averages, reinforcing the positive bias.

The MACD line has crossed above the signal line and remains above the zero line, indicating strengthening bullish momentum. Additionally, DI+ is positioned above DI- on the ADX indicator, highlighting strong buying pressure. As long as the stock holds above the Rs 1,210-1,200 zone, the pullback is likely to extend further.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)