Chartist Talks: Sudeep Shah recommends a Bull Call Spread strategy and selects these two largecap stocks for the Nifty next week

Chartist Talks: Sudeep Shah recommends a Bull Call Spread strategy and selects these two largecap stocks for the Nifty next week

Shah, of SBI Securities, believes Nifty might continue consolidating in the next week between 22,280 levels on the downside and 22,800 levels on the upside, given that the world markets are in a comeback mode after the US Fed Policy Statement.

According to Sudeep Shah of SBI Securities, the Nifty may spend the next week stabilizing between levels 22,280 on the downside and 22,800 on the upside.

"Any move beyond 22,800 zone could imply continuation of the advance up to 23,050-23,200 levels, which is the highest part of the rising channel mentioned earlier," he said.

Therefore, the deputy vice-president and head of SBI Securities' sophisticated and derivative research desk advises traders to use a Bull Call Spread strategy beginning on May 6 in order to capitalize on this possible move higher with a lower risk-reward ratio.

Sudeep, who has over 15 years of experience in technical and derivatives analysis, is optimistic about Mahindra & Mahindra and Coal India, two largecap stocks.

Is it likely to be tough for Nifty to cross the 23,000 barrier next week given the difficulties at 22,800?

Following its new all-time high of 22,794 on May 3, 2024, the Nifty 50 saw substantial profit-taking to the extent of over 450 points from higher levels, while the India VIX increased to 15 levels on the upside. In the last 16 sessions, the Index has attempted to surpass 22,800 four times, but on each occasion, profit booking from higher levels has been seen. This indicates that in addition to a Bearish Engulfing candlestick pattern forming at higher levels, there may be a creation of significant resistance around the 22,800 zone.

While indexes surged to a new high on Friday, the momentum indicator, the relative strength index, or RSI, failed to reach its previous swing high, indicating negative divergence on the daily timeframe for Nifty.

The index is still holding its 50 DMA zone of 22,280–22,300, which is also the lower encouragement zone of the upward rising channel Nifty, which has been trading since January 2024. This is important to note even though it is important to be a little cautious due to the overhead resistance that is beginning to form.

We believe that Nifty may continue to consolidate in the next week between 22,280 on the negative and 22,800 levels on the upside, given that the world markets are now in a comeback mode after the US Fed's policy statement. Any rise over the 22,800 zone may indicate that the rally will continue to the top end of the previously described rising channel, which is between 23,050-23,200 levels. Profit booking on the index may accelerate below 22,280 and reach levels between 22,000 and 21,900.

From the standpoint of the Indian market, the dollar index's decline to levels between 104.80 and 105 as well as the stabilization of Brent crude oil prices around $83 and $84 per barrel are also encouraging signs.

What does the F&O data have to say about the Nifty direction as well? Do you have any clear indications that a trend is underway?

Although Nifty Futures showed signs of long unwinding after Friday's sharp sell-off, there was also heavy put writing in the 22,500 and 22,200 strikes despite the decline, suggesting that 22,280–22,350 might serve as a solid support level. Although substantial call writing in the strikes of 22,500, 22,000, 600, and 27,000 suggests that the 22,730, 22,800 zone may serve as a powerful resistance. The monthly Put Call Ratio (PCR) of 1.3 for Nifty suggests that lower levels of purchasing support are probably in store.

Which F&O trading approach would you want to use for the Nifty and Bank Nifty the next week?

In light of our expectation that the Nifty will find support and rise from these lower levels, we recommend traders try a Bull Call Spread strategy, which entails buying 22,500 Call at Rs 137 and selling 22,700 Call at Rs 63, alongside an outflow of 74 points (maximum loss capped at Rs 1,850) as well as a potential profit of 126 points (Rs 4,926). We advise holding the stop-loss on this Bull Spread at 22,280.

Strong supports for the recently outperforming Bank Nifty are located at its 20-day EMA (exponential moving average) zone, which is located between 48,350 and 48,400. As long as this zone is maintained, we anticipate more index gains between 49,600 and 49,850, although with some pullback.

When one has a fairly positive outlook, the Bull Call Spread strategy entails purchasing in-the-money (ITM) call options and selling out-of-the-money (OTM) call options with the same expiration date.

There are a few industries you believe may have favorable momentum in the next week.

When compared to the Nifty50, the sectoral indices that have outperformed are auto, energy, CPSE, metals, and PSU banks; the IT and media sectors, on the other hand, may continue to underperform going forward. These sectors' ratio charts have reached new highs.

Which two stocks have a chance to profit in the next week?

India Coal

Since September 2023, Coal India has been in a strong uptrend, regularly closing above both its short- and long-term moving averages. Following its peak in February 2024, the stock experienced profit booking and proceeded into a consolidation period. Nevertheless, the stock surged with significant volumes (highest since September 7, 2023) when its Q4 results were announced.

Furthermore, the RSI momentum indicator has risen above 60, suggesting that the stock will continue to gain momentum. With a solid undercurrent in the majority of PSE stocks, we expect Coal India to maintain its upward trend in the next week and progressively move closer to the Rs 500–515 mark. At Rs 455, the stock might be purchased with a stop-loss.

Mahindra and Company

Following the release of the monthly vehicle sales data, the sector as a whole has outperformed, with M&M leading the way. The company finished the week at an all-time high, beating other Nifty heavyweights. Additionally, the company's most recent product introductions have received positive feedback from the market.

On the weekly timescale, a notable Bullish Engulfing type of candlestick pattern has developed, indicating strong momentum in the stock as it has maintained above all of its important short- to medium-term moving averages. Given the sustained above 70 levels of the momentum indicator RSI and the month-long trend of strong delivery volumes, we advise purchasing the stock with a target price of Rs 2,280–2,340 and a stop-loss at Rs 2,080.