Trade Setup for June 5: Caution is the way to go as rangebound Nifty 50 begins new week

The Nifty 50 is back into consolidation territory. While you may be happy for the fact that it has not managed to break below certain levels on the downside, it has not managed to cross certain levels on the upside either. To put levels into perspective, while it continues to find support between 18,400 - 18,500 on the downside, it continues to find resistance at 18,600 on the upside.

This trade continued to playout last week as the index ended flat on a weekly basis. The Nifty 50 made an intraday low of 18,464, while it failed to cross the 18,600 mark thrice last week, making an intraday high of 18,662. That level holds the key for the new trading week, even though it is well over 100 points away from where it ended on Friday.

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"For the Nifty 50 to resume its uptrend, it has to give a decisive close above the mark of 18,600," said Ashwin Ramani of SAMCO Securities. He considers that level to be a key resistance as Call writers are active there. "On the downside, 18,500 is a key support and a break below that can take the index down to the next support level of 18,200," he said.

The Nifty Bank also ended flat last week with a negative bias. After closing one above the mark of 44,000 on a weekly basis, the index was back below those levels, ending near the 43,950 mark on Friday. Even here, the index has failed to cross the mark of 44,500 on the upside, while its last three intraday lows have revolved around the 43,700 - 43,800 mark.

According to Kunal Shah of LKP Securities, the Nifty Bank index is currently witnessing a fight between the bulls and the bears, indicating a state of indecisiveness in the market. He sees downside support for the index at 43,500 on the downside, while resistance on the upside is seen at 44,200. "A break on either side of these levels can indicate a directional move in the index," he said.

SAMCO's Ramani observed that the Nifty Bank index closed above its 13-Day Moving Average on Friday. He said that the level of 44,000 will act as a make-or-break level for the index and the options activity around those levels will provide further cues on the direction of the index going forward.

While the market consolidates, an index that continues to make new high is the Nifty Midcap index. The action, according to a lot of analysts lies within the broader market space. The Nifty Midcap index has now gained for 10 weeks in a row, closing at another record high on Friday.

"The areas that have done well for us in midcap would be broadly the manufacturing part of the sector, which is industrial, capital goods, and the likes. And there the companies that we own without getting into specifics, have actually beaten consensus earnings estimates anywhere to the tune of 20-30 percent. So we do think that that part of the economy is really at a very phenomenal pace. And that's by and large, what has helped us in our midcap fund overall," said Trideep Bhattacharya of Edelweiss AMC.

The June futures for the Nifty 50 index added 2.8 percent in Open Interest on Friday, along with 2.5 lakh shares. They are now trading at a premium of 101 points, compared to 82.25 points on Thursday. The Nifty Bank futures too added 47,600 contracts or 2.2 percent in Open Interest.

Put-Call Ratio for the index is now at 0.95 from 1 on Thursday. No stocks are currently in the F&O ban period.

For this week's options expiry on June 8, the Nifty 50 options have seen Open Interest addition in a broad range. While addition was seen in the 18,600 and 18,800 strikes, the 19,500 call, which is still another 1,000 points away, also saw addition in Open Interest.

A similar trend has been observed on the put strikes. While the 18,500 and 18,600 strikes continued to see addition in Open Interest, the 18,000 strike put also saw Open Interest addition.

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US markets ended the week on a high on Friday led by a stronger-than-expected jobs report and the debt ceiling resolution being passed in the Senate as well. The Dow Jones jumped over 700 points on the last trading day of the truncated week to register its best single-day performance since January this year.

The S&P 500 and the Nasdaq climbed 1.4 percent and 1 percent respectively. The Nasdaq had its sixth straight weekly advance. Both S&P 500 and the Nasdaq rose to a 14-month high on Friday. The FOMC meeting scheduled for June 13-14 are the immediate triggers for the market there.

Singapore (SGX) Nifty futures, which are an early indicator of how the market is likely to open back in India are indicating a gap-up opening. The index is currently trading 90 points or 0.5 percent higher at 18,717.5.

Foreign investors remained sellers in the cash market on Friday, while the domestic investors were buyers.

Nagaraj Shetti of HDFC Securities observed the formation of a small negative candle with a minor upper and lower shadow on the weekly chart of the Nifty 50 index. "By considering previous consolidations in the recent past and the negations of such bearish patterns subsequently, one may expect upside bounce in the market in the coming week," he said. 18,400 - 18,300 is a support zone, while 18,650 - 18,850 is a resistance band.

In case the Nifty 50 index crosses the resistance band of 18,600 - 18,670 on the upside, it will soon challenge the all-time high levels of 18,887.6, said Sameet Chavan of Angel One. "We advise traders not to get carried away by such small declines. Broadly, we are in a strong uptrend and it’s advisable to focus on the larger picture," he said.