8,700 key resistance for NSE’s Nifty
The appointment of Urjit Patel as Raghuram Rajan’s successor at Reserve Bank of India (RBI) has been absorbed by the market. Earnings patterns have been reasonably positive till date. The market has, however, remained range-bound and unable to breakout beyond resistance at 8,700 in the past few sessions.
The trading patterns of Tuesday indicated shortcovering and specific news about Indian corporates could be enough to temporarily counterbalance nervousness about news from the Federal Reserve’s retreat to Jackson’s Hole.
The past two weeks have indeed seen the market more or less marking time. The Nifty has moved between 8,575 and 8,700 and the rupee has also been range-bound. There has been some hardening of bond yields since Patel is reckoned to be as much of an inflation hawk as Rajan. Globally, there has been some sort of bull run in commodities, with metals and crude oil up.
Foreign institutional investors (FIIs) have continued to be net India investors, while domestic institutions have sold. The breadth has been good since retail is also bullish. A good monsoon has boosted sentiment. If the Fed makes hawkish noises about raising rates in December (the earliest the market reckons likely) there could be some FII selling and the dollar might harden. Otherwise, there may be a relief rally with risk on sentiment dominating the situation.
The earning seasons has been quite positive. Technically, the Nifty has hit a sequence of higher highs and higher lows. However, its inability to close above 8,700 could mean that the rally is finally running out of steam. Nevertheless, every trend following system would suggest staying long until and unless there is a clear trend reversal. In terms of targets, the optimists would hope the run will last until the record high of 9,120 is broken. The Nifty could run-up till the 9,000 or higher in the next 10 sessions if it does break past 8,700.
In the Nifty Bank a minor breakout has already occurred, with the index moving past resistance 1975 and now testing resistances above 19,300. If the Nifty Bank and the Nifty itself maintain their normal relationship, this is a leading indicator that suggests the Nifty will also break out.
A long September 29, 18,800p (141), long September 29, 20,000c (166) costs 307, with the index at around 19,300. Note that the call premium is higher despite the put being much closer to the money. This long strangle could be struck, given two big sessions in either direction. The trader could sell the September 1, 18,800p (18) and the September 1, 20,000c (20). This short strangle reduces the overall costs if it is not struck. If it is struck, the long strangle would gain enough to offset short losses.
The Nifty September call chain has peak open interest at 9,000. In the Nifty September put chain, there's good open interest (OI) till 7,500p, with big peaks at 8,000p, 8,500p and 8,600p. The Nifty is currently held at 8,632. The put-call ratio is not reliable this close to settlement.
A bullspread with long September 8,800c (85), short 8,900c (51) costs 34 and pays a maximum 66. This position is 170 points from money. A bearspread with long September 8,600p (101), short 8,500p (71) costs 30 and pays a maximum 70. This is just 30 points from the money. Obviously the bearspread looks more attractive. The skewed premiums indicate how optimistic traders are.
The market does seem set to continue to trend upwards, barring unexpected news flow and some change in the global sentiment. It is hard to set targets but a breakout from here would impart fresh momentum into the trend.
The Nifty could run-up till the 9,000 or higher in the next 10 sessions if it does break past 8,700