Trade Setup for Feb 07: Midcap stocks may provide better risk-reward compared to Nifty 50

Monday turned out to be the first day in a while when the Nifty 50 index traded in a "narrow range." Only 125 points separated the day's high and the low. It found support on the downside at 17,700 but could not sustain above the 17,800 mark for long.

It has been eight trading sessions since the Nifty 50 had a close above the mark of 18,000, which has now become a major resistance on the upside. Metal stocks dragged the index lower on Monday but the broader market outperformed.

For today's trading session, while the Adani Group companies continue to remain in focus, there will be multiple earnings reactions from the broader market space. Bharti Airtel and Adani Ports will be among the final few Nifty 50 companies to announce results for the quarter today.

Harish Krishnan of Kotak AMC believes that there has been some moderation in valuation and some pockets of opportunities have emerged due to the same. "That is what we would want to use to allocate at this point of time, from a portfolio point of view," he said.

Within sectors, he has cut the underweight on IT and gone neutral but still finds valuations on the higher side but finds value among gas utilities, building materials or cement. "Over there, we have a lot more comfort on both in terms of valuations, as well as the fact that the gross margin compression that we've seen, for a lot of them is behind us, and we're likely to see some kind of operating leverage," he said.

Ruchit Jain of 5paisa.com believes that the immediate resistance for the Nifty 50 index lies at the 20-DEMA of 17,879, above which the index can head towards the channel resistance of 18,000. On the downside, he finds some support between 17,500 - 17,450.

The Nifty 50 has been making lower tops on the daily charts, suggesting waning bullishness, according to Rupak De of LKP Securities, who believes that levels of 17,650 may be protected on the downside. He expects the near-term trend to remain sideways with upside resistance at 17,950 - 18,000.

Benchmark indices on Wall Street had another down day on Monday as investors turn increasingly cautious about rising bond yields. The Dow Jones ended with a negative bias after recovering from the day's low at which it was down as much as 240 points.

The S&P 500 fell 0.6 percent while the Nasdaq continues to witness some profit booking at higher levels, ending 1 percent lower

Treasury yields on the 10-year benchmark rose nearly 11 basis points to 3.64 percent while the two-year yield added 18 basis points, rising to 4.48 percent.

Subash Gangadharan of HDFC Securities says that while the bias on the Nifty 50 remains positive for the next few days, he expects the index to consolidate between the 17,400 - 18,000 range. He advises traders to focus on stock specific activity.

5Paisa's Jain sees opportunities emerging within the Midcap space. He believes that the Midcap100 index has formed a support base between 30,000 - 29,900 range and in case the index manages to hold the same, it will be seen as a "triple bottom" formation. "Hence, the midcap stocks seems to have started gearing for the next leg of upmove and hence traders should look for stock specific opportunities from this space," he said.

Kunal Shah of LKP Securities wants the Nifty Bank index to surpass levels of 42,000 on a closing basis for further momentum. Till then, he advises a buy-on-dips approach with downside support seen at 41,500 - 41,400.

For Thursday's weekly options expiry, the 17,800 strike call of the Nifty 50 added close to 31 lakh shares in Open Interest, along with the 18,000 Call, which added close to 31 lakh shares.

On the downside, the 17,800 put added 6.55 lakh shares in Open Interest.

Nifty 50's put-call ratio is back below the 1 level at 0.95 from 1.16 on Friday. Adani Ports, which also reports results today, continues to remain in the F&O ban period.

Despite covering some shorts on Friday, the long-short ratio of FIIs continues to indicate heavy short positions. In case these positions start getting covered, it can be a major trigger for the market to rally in the near-term, according to 5Paisa's Ruchit Jain.