A climb above 8,380 will be a bullish signal

There has been some recovery in sentiment and index values in the past two weeks. It started with the Reserve Bank of India (RBI) cutting the policy repurchase rate by an unexpectedly large 50 basis points. Traders are also betting that the US Federal Reserve will not raise America's policy rate in calendar 2015.

However, the market is still not definitively back in bullish territory. In technical terms, the indices have not been able to break out above the 200 day-moving averages (DMA). This week could be critical, what with important macro economic data and corporate results flowing.

It must be noted that RBI's policy statement was pessimistic and so was the US Fed's. Several analysts are also flagging the September quarter as likely to be weak in earnings. However, the Index of Industrial Production (IIP) has rebounded in August and that could mean positive earnings surprises. Inflation has risen in September but RBI's cut has gone through and that might not affect sentiment.

The Nifty has seen a pattern of higher lows, with a low of 7,691 (September 29) versus a prior low of 7,539 (September 8). But, the rally hit heavy resistance at 8,200-plus. The exponential 200 DMA is around 8,180 and the simple 200 DMA at 8,380. A climb above 8,380 would be very positive. Otherwise, this might be written off as an intermediate rally within a bear market.

Volatility expectations remain high. Other technical signals are somewhat positive. Advances have outnumbered declines in the past fortnight and the net institutional position is positive in October. So far, FIIs (foreign institutional investors) have been net buyers in October, after two months of heavy selling. The rupee has seen a pullback till above 65, though it has still seen net losses in this financial year. The forex market is liable to stay very volatile. The results and forecast from Infosys have not pleased the market much and this could mean a negative impact on the information technology sector.

The Bank Nifty has pulled back above 17,500 but it has also looked to have a choppy trading action rather than developing a clear trend. A long 18,000c (215) and long 17,000p (180) costs 395, with the index held at about 17,600.

This strangle would hit break-even at 16,600 and 18,400. Either end could be hit in three trending sessions, with the settlement to come on October 29. The brave trader might consider selling this, or a wider position, if he thinks volatility will not hit that much. The Bank Nifty's put-call ratios seem positive.

The Nifty's put-call ratios are positive at about 1.2 (October) and above 1.1 (three-months). The call chain for October has high peaks at 8,200c, 8,300c, with good open interest (OI) till 8,600c. The October put chain has big OI peaks at 8,100p, 8,000p and 74,000p with reasonable high OI at every strike down to 7,000p.

The Nifty traded at 8,150 on Monday. Close to spot, the premia are high in the 8,100p (101) and 8,200c (87). At more distance, a bullspread of long October 8,300c (45), short 8,400c (22) costs 23 and pays a maximum 77 and it's about 155 points from spot. A bearspread of long October 8,000p (72), short 7,900p (51) costs 21 and pays a maximum 79 and this is 145 points from spot. These spreads can be combined and the risk: reward ratio is positive with possible payoffs of 55 versus costs of 45 and break-evens at 7,954, 8,345. The trader has to make a difficult judgement call. If volatility dips, these spreads should be reversed and sold. But, volatility is very likely to stay high.