Trade Setup for Jan 23: Nifty 50's fate lies in the hands of earnings reaction to heavyweights

It was the first time in two months when the equity markets managed to post weekly gains for back-to-back weeks. Although the gains were modest courtesy the weakness over the last two days, the Sensex and Nifty 50 managed to remain above the flat line.

The Nifty 50 lost over 100 points across Thursday and Friday and also failed to cross Thursday's intraday high of 18,155. It was the third straight session of the index making a lower high.

For the new week, all will depend on the earnings reaction to index heavyweights like Reliance Industries and ICICI Bank, which reported their December quarter results on Friday and Saturday respectively. Also reacting to results would be names like JSW Steel, Kotak Mahindra Bank and UltraTech Cement.

Kenneth Andrade of Old Bridge Capital believes that he expects a flow of money from equities to fixed income this year due to yields being where they are. He also said that the rise in interest rates will bring about a decline in valuation. Among the sectors, he preferred largecap IT stocks owing to their revenue visibility and cheaper valuations.

The Nifty 50 continues to lack in specific direction and is stuck in a range of 17,900 on the downside and 18,200 on the upside, according to Nagaraj Shetti of HDFC Securities. He expects the choppy movement to continue in the market ahead of the Union Budget. Resistance on the upside is seen at levels of 18,150 - 18,200.

While the benchmark indices ended lower on Friday, the Nifty Bank index continued to outperform, ending with gains of close to 200 points. However, the index failed to break above the key level of 42,700. The Nifty Bank is stuck in a range of 42,000 - 42,700, according to Kunal Shah of LKP Securities. He believes that only a break on either side will give the index some direction.

Benchmark indices on Wall Street ended higher on Friday after briefly losing momentum in the previous session. The Dow Jones ended with gains of over 300 points while the S&P 500 gained close to 2 percent. The Nasdaq also went back above the mark of 11,000.

For the week though, the Dow and S&P 500 ended lower while the Nasdaq gained for the third straight week.

A JPMorgan strategist said stocks could be headed lower as corporations are expected to lower their guidance as inflation and the slowing economy chisel away at profits.

The Nifty 50 has formed a Doji candlestick pattern on the weekly chart, according to Ruchit Jain of 5paisa.com. Such a pattern indicates indecision for the second straight week. The index will only get further direction once it breaks above the range of 17,770 - 18,270, within which it has been trading over the last four weeks.

Jain advises traders to look for stock specific opportunities within the PSU stocks, as they can continue to outperform in the near term.

Rupak De of LKP Securities concurred with the indecision on the index as it remained below its 50-day and 50-week exponential moving average. However, he said that the long-term bullish setup on the index remains intact.

For the last weekly options expiry of the month on January 25, the 18,100 strike call of the Nifty 50 added close o 90 lakh shares in Open Interest, followed by the 19,000 call, which added 70.64 lakh shares.

On the downside, the 18,100 put added 42.2 lakh shares in Open Interest, while the 17,800 put added 28.63 lakh shares.

After a two-day drop, the Nifty 50's put-call ratio has declined below 1 to end at 0.83, from 1.2 on Thursday.

GNFC and Manappuram Finance are out of the F&O ban. PVR has entered the ban period while L&T Finance Holdings and Delta Corp continue to remain in the ban.