The market reacted more than expected to the latest Credit Policy, which was disappointing but on expected lines. The Bank Nifty has broken down below key support. The financial index is likely to go lower. If it drops below 11,000, a reaction till 10,500 level is possible during November.
A bounceback would hit resistance at 11,300 and if that is beaten, it will hit another resistance at 11,450. The Bank Nifty futures is at 75 points or so premium to the underlying and a drop in cost of carry with the futures aligning closer to the underlying index is likely. A short Bank Nifty position with a stop loss at 11,450 (futures price) may be lucrative.
A look at specific banking stocks suggests that the brunt of pressure will be on PSU banks. Technically the pricelines of SBI, PNB, Bank of Baroda and Union Bank look weaker than private sector banks like Yes Bank, Axis Bank and HDFC Bank although every banking stock seems bearish.
Fundamentally, PSUs have more stressed balance sheets. The Q2 performance of SBI may be crucial to the trend. If the SBI results are par or below-par, the bearish pressure will intensify.
Another set of shorting possibilities exist in NBFCs. Most stocks in this space look tempting shorts with the exceptions of IDFC, HDFC, and perhaps, SRF Transport. The infra-specific PFC and REC have seen reactions and so have LIC Housing and Reliance Capital.
The price lines all look as though there’s been a trend breakdown and to get full value, shorts would have to be held for three-five sessions or longer. Over this timeframe, the shorts would have to be taken in futures. Leverage and stop losses are important.
One way to judge the most attractive short futures is to filter through successive sets of daily moving averages (DMA) set at say, three days, five days and 10 days. If the futures have a sell signal on all three DMAs, it is a stronger downtrend than if there’s a sell signal on just one DMA or two DMAs.
In trend-following shorts, there are many ways to determine stop losses. One is to use moving averages for the stop loss as well – a one per cent move above a given DMA could be a sell signal. This stop loss will automatically change with the price.
Another way is to set stop losses slightly above respective closing prices of Tuesday. An upmove on short-covering should end at those levels. These are rigid stops – they will need to be shifted down if positions run into profits. Another approach is to set stop losses at the seven-session or 10-session highs. These stops will also change over time if the stocks slide.