Staying long with stop loss at around 8,650

Political risk is now taking front stage as the US elections draw closer. Going by global market movements, Hillary Clinton is seen as the preferred candidate. In addition to Trump Vs Clinton, Indian investors are focussed on several local macro-economic events and data.

The upcoming spectrum auctions will be watched with great interest. It’s unclear how enthusiastically telecom operators will bid and auction revenues are vital for balancing the budget. The Reserve Bank of India’s (RBI’s) next policy review on Tuesday is seen to be critical as well.

This will be the first review led by Urjit Patel and the first one, where the new Monetary Policy Committee will be voting on decisions. It remains to be seen how the central bank manages the news flow. As of now, most analysts expect status quo but there are optimists hoping for a rate cut. In three key reviews in September, the European Central Bank, the Bank of Japan and the US Federal Reserve all opted to maintain status quo. However, the Fed talked tough, increasing consensus expectations for a dollar rate hike in December.

The Nifty has held onto key support at around 8,700. (The latest low was at 8,688.) If the index drops below 8,650, it could slide till 8,450. On the upside, the last high was at 8,970. A move past 8,970 would maintain the pattern of higher highs that has prevailed since early March. Assuming support at 8,6508,700 holds, a bounce above 8,970 would be expected if RBI does cut. A breakout from these levels may have enough momentum to go till 9,250 (a new record high).

The rupee volatility will also be a factor since $26 billion of dollar-rupee FCNR swaps is to be reversed over the next three months. Government bond yields have stayed low, partly on strong foreign portfolio investor buying. The rupee could become a target for traders if it weakens during the swap reversal, or if the Monetary Policy Committee takes unexpected decisions.

August and September have seen selling by domestic institutional investors but FPIs remain strongly positive for August and for September. Retail remains positive. Technically, the Nifty has registered a sequence of 52-week highs. So, we’ll have to assume that the long-term and intermediate perspectives are bullish, until and unless the Nifty breaks down. Every trend following system suggests staying long, with a trailing stop loss at around 8,650 or so.

The Nifty Bank remains high-beta. After hitting all-time highs (at 20,459), it has reacted more, hitting support (at 19,475). A long Nifty Bank October 27, 19,200p (165), long October 27, 20,200c (214) costs 380. The index is roughly at 19,650 and higher call premium implies trader optimism. Either end of this long strangle could be struck, given two big sessions in either direction in October settlement. Traders could also sell the October 6, 19,200p (40) and the October 6, 20,200c (50). This short strangle cuts overall costs down by 90. If it is struck, the long strangle should gain enough to offset short-losses.

The Nifty call chain has strong open interest (OI) above 9,000 levels at 9,200c and 9,500c and it has good OI till 10,000c. The put chain has good open interest down till 7,500p. The Nifty is at 8,745. A bullspread with long October 8,900 (79), short 9,000c (46) costs 33 and pays a maximum 67. This position is 155 points from money. A bearspread with long October 8,700p (85), short 8,600p (58) costs 27 and pays a maximum 73. This is only 45 points from the money. So, it is much more attractive but as mentioned above, the uptrend seems more likely.

The rupee volatility will also be a factor since $26 billion of dollar-rupee FCNR swaps is to be reversed over the next three months