Crucial for Nifty to cross 9,709

The index bounced from support at 9,450, as the goods and services tax or GST came into force over the weekend. The initial trader response to GST seems favourable. It remains to be seen if the index can now perform a new record high, beating the early June record of 9,709.

There is nervousness focussed on GST implementation and around the management of the NPA crisis. Brexit negotiations remain on the agenda and the Qatar crisis continues. Traders are also starting to bet on the outcome of central bank meets. The US Fed, the Bank of Japan (BoJ) and the ECB (European Central Bank) have policy meets in the third week of July. At its next policy meet in August, the Reserve Bank of India (RBI) will certainly take cognisance of decisions by the three major central banks. The dollar-rupee rate is stable as of now.

The Fed's mood seems hawkish. The ECB may also be hawkish. Apart from raising rates, the tapering of respective QEs (quantitative easing) by the ECB and the BoJ, and the unwinding of the Fed's bloated balance sheet may be on the agenda. Consensus expectation is that RBI will cut policy rates and loosen up, which would run counter to tighter monetary policy globally. Domestic institutions and FPIs (foreign portfolio investors) remained net buyers in June. The FPIs also bought massive rupee debt. The short-term trend turned negative through last week before the bounce on Monday. The Nifty has to beat 9,709 to maintain a pattern of higher highs and annul negative signals of the past week. Volumes did improve on Monday when Advances were very net positive.

If the uptrend aborts short of 9,709, the support at 9,450 will be crucial. A breakdown below that will probably test the next support at 9,350. An intermediate downtrend could lead to a much deeper correction.

The index moved North in late December 2016 from 7,900 levels. It hit an all-time high of 9,709. 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 9,050 and a dip till 8,800 is possible since that's where the 200Day Moving Average is.

About 10 sessions ago, simple trend following systems suggested staying long in the Nifty futures with a stop loss at about 9,450-9,500. Many traders use similar trend-following systems so there could be some concerted selling if the index slide below 9,450. The VIX has eased down, indicating traders are less nervous. Put-call ratios are not very useful close to settlement.

The Nifty Bank has found support at 23,050-23,100. The July settlement could see either 22,000 or 24,000-plus being hit. A strangle of long July 27, 24,000c (66), long July 27, 22,500p (94) is almost zero-delta with the index at 23,275. But, the premiums are asymmetric, indicating bearish sentiment. Either side of this strangle could be hit, given two or three big trending sessions. The cost can be offset by selling short July 13, 22,250p (26), short July 13, 24,000c (18). If either short position is struck, the corresponding long position will gain.

The July Nifty call chain has peak open interest (OI) at 9,700c and 9,800c, and high OI at every strike until 10,500c. The July put chain has very high OI at every strike down to 9,000p and substantial OI below, till 8,000p, with peaks at 9,400p, 9,200p, 9,000p and 8,800p.

The Nifty is at about 9,615. A bullspread of long 9,700c (59) short 9,800c (27) costs 32 and pays a maximum 68. A bearspread of long July 9,500p (59), short July 9,400p (38) costs 21, pays a maximum of 79. These wide spreads can be combined for a long-short strangle set, costing about 53, with a maximum payoff of 47.