Nifty: Nifty could test 17,300 if 17,500 support is breached

Technical analysts expect the Nifty to fall further in the week ahead of the Union budget for fiscal year 23 on February 1. Analysts have said the Nifty could fall to 17,300 if it breaks support at 17,500. The indices fell 3.5% last week – recording their worst weekly performance in eight weeks – amid concerns regarding inflation and US Federal Reserve policy tightening. Analysts are bullish on sugar, fertilizers, defense and real estate in the near term.


Where is Nifty headed in the week before the budget?
If the Nifty breaks below 17,500, it would witness a sell off, which would take the index towards 17,300-17,100. However, if it breaks through and holds above the 17,800 levels, it would witness a buying, which would drive the index towards the 18,000-18,300 levels. The index is trading above the 50-day short-term moving average, which is an important factor. Both the daily and weekly Relative Strength Indicator (RSI) are in bearish mode, which supports the bearish sentiments ahead. For the week, we expect Nifty to trade in a range of 17,300-17,900 with a mixed bias. We expect the index to remain volatile ahead of the budget, so focus on a specific sector/stock approach. We expect sugar, fertilizers, defense and real estate to do well in the short term.

What should investors do?

We suggest a bearish strategy for the monthly expiry scheduled for January 27th. The strategy is a put ladder, which involves buying one lot of Nifty 17,650 put options at Rs 160 and selling one lot of 17,450 Put at Rs 84 and one lot of 17,250 Put at Rs 43. Traders should note that the Put Ladder is a strategy of limited profit and unlimited risk. The maximum profit of Rs 8,350 will be reached at 17,450 levels, while losses will follow below 17,000. The cost implies an exit of Rs 1,650, which is the maximum loss if Nifty closes and stays above the levels of 17,620 at expiration. Any steeper moves down could result in losses and as an additional put has been sold, it is advisable to exit the strategy to avoid unlimited losses below 17,000. Breakevens are 17,617 on the upside and from 17,017 down.


Where is Nifty headed in the week before the budget?

The Nifty has made the lowest lows since the last three trading sessions. Recently, it broke its supporting trendline to the upside and the immediate trend resumed the pattern of a strong correction driven by weakness in global markets and selling by foreign institutional investors. It has formed a Doji candle on the daily scale after the last three session weakness, but the selling pressure is intact in the upper areas, which needs to be negated for any type of trend reversal. Until the index stays below 17,770, weakness could be seen around 17,500 and 17,350 while hurdles exist in the 17,950-18,000 area.

What should investors do?

Investors are advised to use this decline for buying opportunities and bargain hunting in private banking, consumer, IT, autos and chemicals. Index traders can initiate a bearish put spread by buying 17,600 puts and selling 17,400 puts with a premium cost of around 60 points to hedge downside or head towards 17,400. A specific positive setup to shares could be observed in Reliance, Maruti, ICICI Bank, Pidilite Industries and Power Grid. While weakness is likely in M&M Finance, ZEE, Dr Lal PathLabs and Voltas


Where is Nifty headed in the week before the budget?

Last week’s correction caused a lot of pain among retail participants as the mid and small cap segments underwent a substantial correction with huge corrections in some of the most popular names. This is an imported correction as the Dow Jones fell significantly as the US Federal Reserve is poised to raise short-term interest rates on rising inflation. The Dow is reaching an important 33,600-34,000 support area and the Nifty is also enjoying strong support around the 17,200-17,300 area. The Dow managed to rebound from this support area 3 to 4 times in the last six months or so. Nifty has consolidated around the support above in the recent past. From a medium-term perspective, equities remain in an uptrend as long as these zones are respected.

What should investors do?

Interestingly, despite the weakness in the Nifty (mainly due to the fall in the IT space), the private sector banking space showed signs of buying at lower levels. Bank Nifty has strong support around 36,500 levels and some of the heavyweights are showing signs of strength. It is highly unlikely that the Nifty can break major supports with any visible strength in the banking sector. There is sector churning and this correction so far appears more in a bull market. We suggest not going bearish until the important support areas of the indices are breached. Banking and auto stocks are poised to outperform, with selective consumer product names looking attractive after months of underperformance.

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