Nifty futures and Nifty Bank futures might advance

Nifty 50 (24,334) and Nifty Bank (58,521) gained 0.5 per cent and 0.8 per cent, respectively, last week, extending their recovery. The gains came despite a sharp decline in open interest in the July futures contracts ahead of the monthly expiry. While a part of the drop can be attributed to rollover activity, the derivatives positioning indicates that institutional sentiment improved during the week.

Foreign Institutional Investors (FIIs) turned less bearish. Their net short position in index futures declined 15 per cent to 2.17 lakh contracts from 2.55 lakh contracts. More notably, net short positions in index call options plunged 68 per cent to 69,411 contracts from 2.19 lakh contracts, while net long positions in index put options eased 17 per cent to 3.98 lakh contracts from 4.79 lakh contracts. The sharp reduction in bearish call positions suggests that institutional investors have moderated their negative outlook.

The broader positioning, however, remained mixed. Combined FII-retail net short positions in index futures declined 17 per cent to 70,562 contracts from 85,080 contracts, reflecting lower bearish exposure. But net short positions in index call options surged 56 per cent to 2.81 lakh contracts, indicating aggressive call writing at higher levels. Meanwhile, net put shorts narrowed sharply to 72,873 contracts from 1.51 lakh contracts, indicating that put writers have scaled back their bullish bets.

Overall, the derivatives data points to improving institutional sentiment, although the broader market remains cautious. On the charts, Nifty has reclaimed the 24,300 level, while Bank Nifty has moved above 58,500. Sustaining above these levels can strengthen the bullish case in the near term.

While we have suggested trades below, we would like to mention that the risk is higher given the geopolitical uncertainties. Therefore, risk-averse traders can refrain from initiating fresh positions.

Nifty futures (Jul) (24,322), after opening with a gap-up last Monday, saw a strong recovery during the same session. However, the rally lacked follow-through and the contract drifted lower over the subsequent sessions. The decline, though, was limited as support emerged at lower levels. A strong rally on Friday eventually lifted the contract above the resistance at 24,300.

Despite the rally, open interest (OI) in July futures declined from 166 lakh contracts to 146 lakh contracts over the past week, indicating short covering. The Put Call Ratio (PCR) also continues to reflect a positive bias, with the July and August series standing at 1.14 and 1.19, respectively, on Friday.

Overall, while the derivatives data does not indicate an outright bullish signal such as fresh long build-up, it points to an improving bias for Nifty futures.

As long as the contract sustains above 24,300, it can witness another leg of the rally towards 24,570. A breakout above this level can pave the way for an advance to 24,750.

Alternatively, if Nifty futures slips below 24,300, it can retest the support zone of 24,000-23,900. A breach of 23,900 will weaken the outlook and expose the contract to a decline towards 23,600. A break below 23,600 can accelerate the fall to 23,250.

Overall, with Nifty futures having reclaimed the 24,300 level, the bulls hold a slight edge.

Strategy: Although Nifty futures has moved above 24,300, we recommend waiting for a breakout above 24,400 to avoid a false breakout. Go long above 24,400 with a stop-loss at 24,100. Once the contract rises to 24,570, revise the stop-loss higher to 24,450. Book profits at 24,750.

Nifty Bank futures (Jul) (58,534) also spent most of the week in negative territory before staging a sharp rally on Friday, which lifted the contract above the hurdle at 58,500. The move was accompanied by a decline in open interest from 21.5 lakh contracts to 20 lakh contracts, indicating short covering.

Notably, the PCR of the July series improved from 0.94 on July 10 to 1.01 on July 17. This is a posi...