All-time highs if 6,230 breached

While most Indian macro-economic data was weak, it also seems to have been discounted, at least temporarily

The market continues to have a bullish bias but it's running into heavy resistance above the mark of Nifty 6,200. The Q2 results released have been slightly better than consensus. The resolution of the US shutdown has led to the return of FII inflows. While most Indian macro-economic data was weak, it seems to have been discounted, at least temporarily. The trade data are positive at the very least.

The Nifty has tested resistance at 6,230 multiple times without a breakout. We have seen narrow range-trading with support above 6,165. A breakout/breakdown could move the market to test the all-time highs of 6,350-plus or down till 5,900. The intermediate and long-term trends would be accounted bullish while the short-term trend is unclear. A close above the 2013 high of 6,230, would give more confidence. On the downside, the support at 5,850-5,875 is critical since this is where the the 200-Day Moving Average is. We are within 10 sessions of expiry. But despite the narrow daily ranges and the apparent uptrend, futures and options contracts continue to see relatively large premiums, indicating high implied volatility. Mean-reversion trading models suggest the Nifty will turn by the end of this week, while momentum-based models suggest it will test 6,350. Trend-following signals suggest staying long of course. Among key Q2 results, the IT firms have done well. Reliance has profited by the lower rupee. There has been a speculative run in metals and automobiles. There have been some speculative bullish plays in pharma, where the weak rupee should have lifted results.

The rupee has been trading in a narrow range. However, the dollar seems likely to weaken, given poor US employment data. This should give a boost to equities, since it rules out tapering. The Fed meet in October will certainly see QE3 continuing and it may continue till March. Expect a dollar snapback and a weaker rupee if there are two sessions of FII selling. If the Fed maintains QE3, this could mean the RBI maintains status quo in its end-October policy review. More likely, the RBI will raise the repurchase rate and lower the MSF rate, aligning the two more closely.

The Bank Nifty could run till 11,000 this week or 11,300. It is testing resistance above 10,850. On the downside, the financial index could slide till 10,600. A ticklish issue is these will be on the cusp of the settlement, so the last three sessions could be very volatile. Nifty put call ratios for October-December remain in a healthy range at 1.4 to 1.6. This suggests broad optimism. Option premiums are high for this stage of settlement. Slightly far-from-money spreads can still be taken. One would not suggest selling options far from money yet, due to the possibility of a big swing late in settlement. Traders should still be prepared for moves between 5,800 and 6,400 in this settlement and for high volatility in the last two-three sessions. A bullspread of long Oct 6,300c (35) and short 6,400p (12) costs 23 and pays a maximum 77. A bearspread of long 6,100p (28) and short 6,000p (13) costs 15 and pays a maximum 85. A strangle combining the above costs 38 and breaks even at 6,062, 6,338.