Nifty 9,685 and 10,137 are crucial levels to watch
The market has range traded for the past few sessions remaining in a narrow range despite geopolitical scares caused by North Korea's nuclear test and despite poor GDP numbers. The index has stayed above the recent low of 9,685 (August 11). But, it has not been able to break out above resistance between 9,925 and 9,975.
A move beyond those limits could mean a test of support at 9,450-9,500 or a target of 10,200 (a new high). There's been alternating sessions of gain and loss. The VIX had eased down before Monday but it has spiked again. The advance-decline ratio also went negative on Monday.
It's hard to predict if the market will breakout or breakdown. One guess is that this is a pause within an intermediate downtrend. A break below 9,685 would confirm a pattern of lower lows. On the upside, a breakout above 10,137 (the all-time high) would confirm the big bull market.
Foreign portfolio investors sold equity through August. Mutual funds and domestic institutions remained net buyers. By definition, the longterm trend is positive. The 200Day Moving Average (200-DMA) is just below 9,100. The last positive intermediate trend (which may still be in force) bounced from support at 9,450 in late June to hit 10,137 in early August.
Taking a longer-term view, the Nifty moved North in late December 2016 from 7,900 levels to a high of 10,137 in early August. The length of time and the magnitude means that an intermediate correction could be severe. The first Fibonacci level is at around 9,250-9,300 and a dip below 9,000 would break the 200-DMA.
Simple trend following systems are always confused by range-trading periods. The current trend-following signals suggest selling Nifty with a stop-loss at 9,975 or 10,000. Anybody who has open long positions should place stoplosses in the 9,625-9,650 zones.
The Nifty Bank reacted down from an all time high at 25,200 to 23,822 on August 10, before pulling above 24,000 again. There's resistance above 24,300 and the 23,800 support is critical. The financial index could swing below 23,000 in September, if 23,800 is broken. On the upside, if 24,300 breaks, resistance at 24,500 could be hit. If that breaks, 25,000 or higher is possible.
Three big trending sessions in either direction could push the "Bank" till either 23,000 or 25,000. The financial index is currently held at 24,225. A strangle of long September 28, 25,000c (83), long September 28, 23,000p (68) is not zerodelta - the lower-priced put is much further from money. This lopsided strangle could be offset with short September 14, 25,000c (21), short September 14, 23,500p (48). This is not a calendar spread - all strikes differ. But, long options in the same direction will gain if the short ones are hit. The net position costs 82.
The Nifty PCR is mildly bullish at about 1.1 for September- October taken together. The August Nifty call chain has peak open interest (OI) at 10,000c and high OI until 11,000c. The August put chain has very high OI between 9,500p and 9,800p, with high OI down till 9,000p.
The Nifty closed at 9,913 on Monday. A bullspread of long September 10,000c (84) short 10,100c (46) costs 38 and pays a maximum 62. This is 87 points from money. A bearspread of long September 9,800p (76), short September 9,700p (54) costs 22, pays a maximum of 78 and is 113 points from money.
These spreads are near zero-delta and could be combined. The resulting position costs 60, with breakevens roughly at 9,740, 10,060. One side of this strangle set is nearguaranteed to be hit in the current settlement.