Bank Nifty goes weak in the knees; time for caution

Special to Firstpost

S&P CNX Nifty (5,850.30): As anticipated last week, the index met with resistance at the 5,940-5,970 range and a massive 90-point selloff ensued on Thursday. The only ray of hope for the bullish camp is that the index is still holding above the support level of 5,820-5,850. A crack below this low would lend momentum to the downtrend and would strengthen the case for a slide to the support zone at 5,650-5,700.

The key resistance zone at 5,940-5,970 is the preferred shorting zone, followed by 6,020-6,040. As long as the index trades below the recent high of 6,112, the path of least resistance would be on the way down and a test of 5,650 would be the favoured outcome.

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[caption id=“attachment_636988” align=“alignleft” width=“620”]  The only ray of hope for the bullish camp is that the index is still holding above the support level of 5,820-5,850.[/caption]

From a trading perspective, the volatility is likely to perk up ahead of the Union budget and the expiry of the February series derivatives contract.Given this scenario, it makes sense to trade light and reduce the position-size to accommodate increased volatility. Sector-wise, banking remains the most vulnerable to break down and drag the Nifty along with it.

The CNX IT index, along with the oil and gas sector, is likely to act as a shock absorber that would mitigate the impact of the banking sector. Any recovery in the Nifty would be an opportunity to pare exposures and also initiate short positions with a stop-loss above 6,112.

CNX Bank Index (12,068.95): The crack in the bank index played a key role in pulling the Nifty down last Thursday. The short-term outlook for the index remains bearish and a slide to the support zone at 11,700-11,800 appears likely.

As highlighted last week, the immediate resistance is at 12,400-12,500 range. Any recovery in this index may be used to reduce exposures in the banking sector stocks.

Though individual stocks offer a compelling long trade with an acceptable risk-reward matrix, long positions may be avoided in the Bank Nifty until there are clear signs of stability and emergence of buying interest.

Biocon (Rs 287.20): The stock has been consolidating in a trading range in recent weeks and the price action on Friday indicates that an upside breakout from the range is likely. The stock closed on a positive note last Friday, backed by an increase in trading volumes as well, suggesting buying interest.

The short-term outlook for Biocon is bullish and the stock could rally to the immediate resistance at Rs 310. Long positions may be considered with a stop-loss at Rs 270, for a target of Rs 310. A move past Rs 310 could help the stock target the major resistance at Rs 325. ( See the chart here. )

ONGC (Rs 323.90): After a sharp rally, the stock has been in a downward correction since 18 January. The price action in the past few days indicates that the stock could seek higher levels in the short-term. Investors may buy the stock with a stop-loss at Rs 308, for a target of Rs 348.

Those willing to play the waiting game may get exit opportunities at Rs 360. Investors having patience may use a SIP-kind of approach in the stock and hold the stock for a target of Rs 360.

(The views and recommendations featured in this column are based on a technical analysis of historical price action. There is a risk of loss in trading. The author may have positions and trading interest in the instruments featured in the column.)