Chartist Talks: Apply Bull Call Spread strategy for Nifty, but avoid FOMO feeling amid broad-based rally, says Sudeep Shah of SBI Securities

Chartist Talks: Apply Bull Call Spread strategy for Nifty, but avoid FOMO feeling amid broad-based rally, says Sudeep Shah of SBI Securities

Since the overall undertone is bullish, Sudeep Shah of SBI Securities recommends deploying a Nifty Bull Call Spread of June 20 weekly expiry by buying an ATM (at-the-money) 23,500 Call strike at 88 and selling OTM (out-of-the-money) 23,700 Call strike at 25.

Shah with 15-years of experience believes if the index sustains above the level of 23,500, then it may witness the next round of buying interest and test 23,750, followed by a psychological level of 24,000 mark.

Considering the ratio chart of Nifty Smallcap 100 & Midcap 100 indices compared to Nifty, "traders and investors should focus on midcap and smallcap space for the next couple of trading sessions. However, the focus has to be on quality names, and one should not chase low quality names having a FOMO feeling," said Shah, the Deputy Vice-President and Head of the Technical and Derivative Research at SBI Securities.

Do you feel the Nifty is witnessing exhaustion at higher levels?

We feel that Nifty is witnessing timewise correction after high volatile election outcome week. Last week ended June 14, the benchmark index Nifty oscillated in a narrow range of 274 points, which was the lowest weekly range since the last eight weeks. Despite trading in narrow range, Nifty has managed to close the week at an all-time high level with the gain of 0.75 percent. Technically, as the index is trading at all-time high levels, all the moving averages and momentum-based indicators are suggesting bullish momentum.

Talking about levels, if the index sustains above the level of 23,500, then we may witness the next round of buying interest. In that case, it is likely to test the level of 23,750, followed by a psychological level of 24,000 mark. While on the downside, the zone of 23,240-23,200 is likely to act as a crucial support for the index. Any sustainable move below the level of 23,200 will lead to profit booking in index upto the level of 23,000, followed by 22,800 in the short term.

Do you suggest any strategy for index traders?

Since the overall undertone is bullish, we recommend deploying a Nifty Bull Call Spread of June 20 weekly expiry by buying an ATM (at-the-money) 23,500 Call strike at 88 and selling OTM (out-of-the-money) 23,700 Call strike at 25. Total Outflow in this strategy could be 63 points, while the maximum profit potential could be 137 points in case Nifty witnesses expiry above 23,700 on June 20.

Bull Call Spread strategy involves buying one lower strike price Call (ATM) and selling one higher strike price Call (OTM) of same expiration date.

What is your outlook on Bank Nifty for the current week given the 50,250 levels have acted as a resistance during the past week?

The Bank Nifty has also traded in a narrow range of 722 points, which was the lowest weekly trading range since April 2024. On a weekly scale, it has formed a small body bullish candle with shadows on either side. This clearly indicates indecisiveness at higher levels.

The daily RSI (Relative Strength Index) is oscillating in a narrow range of 55-57 zone. Further, the trend strength indicator, ADX (Average Directional Index), is currently quoting below 16 levels, and it is in falling mode, which indicates a lack of strength in any direction.

Going ahead, the zone of 49,500-49,600 level is a crucial support area, and the level of 50,250-50,300 is the resistance zone. A sustainable move on either side would lead to a trending move. Above 50,300, Bank Nifty could witness a trending move upto 50,900-51,200 levels.

How should traders’ approach the midcap and small cap space in the current week?

Despite consolidation in frontline indices, the broader market has shown remarkable performance in last week. The Nifty Midcap 100 and Nifty Smallcap 100 surged by 3.82 and 4.81 percent, respectively. They both have outperformed Nifty index by a decent margin and marked fresh all-time high.

Most noteworthy, the ratio chart of Nifty Smallcap 100 index as compared to Nifty has given a horizontal trendline breakout on a weekly scale. The ratio chart of the Nifty Midcap index as compared to Nifty has marked a sequence of higher tops and higher bottoms. This clearly indicates traders and investors should focus on Midcap and small cap space for the next couple of trading sessions. However, the focus has to be on quality names, and one should not chase low quality names having a FOMO feeling.

Talking about levels, the zone of 54,200-54,000 will act as crucial support for the Nifty Midcap 100 index. As long as it is trading above 54,000 level, it is likely to test the level of 56,500, followed by 57,000 in the short term. While, for the Nifty Smallcap 100 index, the zone of 17,750-17,700 will act as immediate support.

Which sectors are expected to outperform in the short term?

Last week, the stocks from defence and shipping space witnessed strong bullish momentum along with robust volume. We believe they are likely to continue their outperformance in the next couple of trading sessions.

Apart from this, Nifty Auto, Nifty Realty, Nifty Pharma, and Nifty Healthcare space are likely to continue their northward journey.

With a fresh break-out in defense space, what are your top 2 picks?

Bharat Dynamics

The stock marked high of Rs 1,663 on June 3, 2024, and thereafter, it has witnessed correction along with low volume. The correction halted near the 20-day EMA (exponential moving average) level, and it coincides with 50 percent Fibonacci retracement level of its prior upward rally (Rs 902-1,662). The stock has formed a strong base near the support zone and witnessed sharp rebound along with robust volume. The daily RSI has given bullish crossover. Hence, we believe it is likely to continue its upward journey and test the level of Rs 1,670, followed by Rs 1,750 in the short term. While, on the downside, the zone of Rs 1,490-1,480 is likely to act as immediate support for the index.

Cochin Shipyard

The stock has given horizontal trendline breakout on a daily scale. This breakout was confirmed by robust volume. As the stock is trading at an all-time high level, all the moving averages and momentum indicators are suggesting strong bullish momentum in stock. Hence, we recommend accumulating the stock in the zone of Rs 2,120-2,100 level with the stop-loss of Rs 1,990 level. On the upside, it is likely to test the level of Rs 2,250, followed by Rs 2,330 level in the short term.

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