Nifty 9,700 a key support level to watch

The index hit new highs and climbed past 9,800 intra-day though it failed to hold onto those levels. The initial trader response to goods and services tax (GST) has been favourable. Institutional attitude is interesting. The Foreign portfolio investors (FPIs) have been net sellers of a modest ~127 crore (up to July 11) but domestic institutional investors have bought over ~3,500 crore. The market has been low-volume so this has been enough to trigger a breakout.

By definition, the longterm trend must be counted positive. But, two factors must be considered. For one, there was substantial selling on Tuesday and the advance decline (AD) ratio went negative. Second, lack of volume expansion on breakout is usually a negative signal. But, we need to adjust for the National Stock Exchange (NSE) breakdown. Ideally, volumes would pick up and the AD ratio go positive.

The US Fed, the Bank of Japan (BoJ) and the ECB have policy meets coming up and corporate results are also flowing in. The market reaction to both is unpredictable. The Fed's mood is hawkish. The ECB may also be hawkish. The BoJ seems to be prepared to maintain a loose policy. Apart from raising rates, the tapering of the ongoing QE or quantitative easing by the ECB is possible since inflation is picking up in Europe. The unwinding of the Fed's balance sheet may also be on the agenda in the US.

The Reserve Bank of India (RBI) will take note of whatever happens before it makes a call at its policy meet in August. The dollar-rupee rate is stable as of now but forex markets could get choppy. Consensus expectation is that RBI will cut policy rates and loosen up. June inflation numbers and IIP data could obviously influence that decision, along with monsoon trends.

The short-term trend bounced from support at 9,450 and the Nifty beat 9,709 easily to maintain a pattern of higher highs. The 9,700 level is a key support now, a pullback below that level would mean the breakout is aborted.

The index moved North in late December 2016 from 7,900 levels. It has now hit an alltime high of 9,830. The length of this current move (in terms of time and magnitude) indicate that the next intermediate correction could be severe. The first Fibonacci level is at around 9,100 and a dip till 8,850 is possible if there's a full-blown intermediate downtrend.

Simple trend following systems suggest staying long in the Nifty futures with a stoploss at about 9,625-9,650. The VIX has eased down, indicating traders are not nervous despite the levels. Put-call ratios are quite positive at 1.3 plus. In fact, these could be overbought zones.

The Nifty Bank underperformed the Nifty. It broke out till 23,965 but it has retraced more than the Nifty on Tuesday. It's at 23,585 now. The July settlement could still see either 22,500 or 24,500 hit. A strangle of long July 27, 24,500c (20), long July 27, 22,500p (25) is almost zero-delta. Either side of this strangle could be hit, given two or three big trending sessions. This is a very wide position but that's why it's relatively cheap.

The July Nifty call chain has peak open interest (OI) at 9,800c and 10,000c and high OI until 11,500c. The July put chain has very high OI at 9,600p, with high OI below, till 9,000p. The Nifty is at about 9,785.

Premiums seem underpriced. A bullspread of long 9,900c (31) short 10,000c (12) costs 19 and pays a maximum 81 and there's 14 sessions till expiry. A bearspread of long July 9,700p (49), short July 9,600p (29) costs 20, pays a maximum of 80. These wide spreads can be combined for a long-short strangle set, costing about 39, with a maximum payoff of 61. Breakevens could be at 9,661, 9,939.