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The Nifty continued to register successive new highs and it crossed the 9,200 mark on Friday. The correction on Monday still leaves the index above previous all-time highs at 9,127.
This would be a primary support with more support available below the “gap” at around 8,970-9,025. Technicians will note that the gap has not been filled in five sessions. Primary resistance would now be at 9,200-9,250 zone.
If the uptrend persists, short-term targets will be in the 9,300 zone. Obviously every trend following system would recommend staying long. In technical terms, all trends (short/ medium-term and long-term) seem strongly bullish despite the probability of a further short-term correction on profit-booking.
Foreign Portfolio Investors (FPIs) have remained net positive since the Budget and the pace of buying has even improved despite the US Fed hiking policy rates.
Domestic institutions have done some selling in March. Retail attitude is highly positive. The FPI buying has pushed the USD down to 65 levels.
The Nifty Bank has also hit all time highs. The financial index is trending at about 21,100-21,200 now. A long Nifty Bank (March 30) 20,600p (35), and long (March 30), 21,600c (38), costs roughly 73. This is roughly zero-delta. Either end of this long strangle could be hit, given two trending sessions in the next nine.
News-based volatility could continue though global markets seem to be settling down. While the Fed hike has been absorbed, Brexit is edging closer.
President Trump’s fiscal policy, his intentions of imposing tariff and non-tariff barriers against imports, European elections, and so on remain potential new triggers. On the domestic front, there is GST and there are chances of the market responding negatively to other political developments.
The VIX has dipped sharply to the point where it is under-pricing volatility.
Given domestic trends, the rally should be interspersed by bursts of profit booking. Forex traders should also be eyeing long USD-INR positions because the USD will strengthen if there are a couple of sessions of FPI selling.
The March Nifty call chain now has peak open interest (OI) at 9,200c, with another peak at 9,500c, and high OI at every strike until 10,000c. The March put chain has very high OI at every strike down to 8,000p. The Put-Call ratio (PCR) for March and for the three-month is comfortable at above 1.1 but PCR is not very reliable close to settlement.
The Nifty is at 9,127 with about 30 points futures premium. The market seems to be seriously under-estimating volatility with the VIX held near 10. Just eight sessions of March settlement is left. There’s enough news-flow, including overseas news-flow, to create volatility.
A long March 9,200c (41), short 9,300c (14) costs 27 and this is about 75 points from money. It could pay 73. A long 9,100p (42), short 9,000p (19) costs 23 and this is only 25 points from money. It could pay 75.
A combination of these spreads would cost 50 and have breakevens at 9,050, 9,250, with maximum payoff of 50 only.
If you take the view that there will be little volatility in the rest of the settlement, consider taking butterfly spread. For example a long 9,100c (95), two short 9,200c (2x41), one long 9,300c (14), costs 27 and it will pay a maximum of 73 at 9,200 with breakevens at 9,127 (current price), 9,273. Take this if you think there will be moderate gains.
Any trend following technical system would suggest staying long in the Nifty futures, with a trailing stop set at about 120 points below entry point. Given the strong uptrend, be wary of short positions until and unless the index drops, with negative advance-declines ratio, and strong volumes in stocks losing ground.