Sharp profit booking likely if Nifty slips below 12,200

By Vikas Jain
Senior research analyst, Reliance Securities

Where are we: Nifty50 scaled a new all-time high with strong outperformance in midcaps and smallcaps since the start of the calendar year 2020. Over last 21 weeks, the benchmark index gained by 16%, while mid-cap and small-cap indices outperformed with gains of 21% and 23%, respectively.

What is in store: The third quarter results for FY20 have started to come in and the Union Budget to be announced on February 1 will provide lots of cues for the markets. We believe markets would trade with high volatility as VIX is likely to increase with respect to budget expectations in individual sectors and rollover movements ahead of F&O expiry on January 30, 2020. The upside looks capped on the higher side. Sharp profit booking could be witnessed below 12,200 levels as it will turn the monthly candle negative and breakdown of the 20-day average.

What could traders do: We have witnessed good up move in midcaps and smallcaps over the past three weeks keeping the headline index flat. We continue to believe the outperformance will continue in the current year and advise accumulation of high quality midcaps or invest in midcap funds at regular intervals through systematic investment plans. Traders can adopt a bear spread strategy of February 6 expiry of 12,200-11,800 strikes with a net premium of Rs 63 to hedge the portfolio in case the market declines due to any adverse global or domestic news flow.