Bullish trend continues, volatility ahead

The monsoon session of Parliament, earnings season and central bank attitude remain the key drivers for the Indian stock market. Traders are hoping that the long-awaited GST (which was first talked about in 2011-12) will finally pass through in this session. If it does, there will be a long haul and plenty of details to work out but the market will rally. On the earnings front, there are few expectations and lacklustre or average results have, so far, not dampened sentiment.

The Bank of England has decided to stand pat, which disappointed traders. The ECB, the Bank of Japan (BoJ) and the Fed will meet next week and the Reserve Bank of India will host Dr Rajan’s last meet in early August. Traders are hoping that there will be some more liquidity pumped into the markets by the BoJ and the ECB, while the Fed holds off on a rate hike.

In a recent interview, Rajan appeared to rule out rate cuts but his hand may be forced if the Fed does cut. Sentiment could swing in the opposite direction if the expectations are not met. The rupee is likely to see some volatility whatever the central banks do. The Indian inflation data released last week, alongside the Index of Industrial Production data was nothing special. The IIP indicated slow expansion in May, while inflation edged up in both the indices.  In earning season, TCS and Infy have disappointed and so has Unilever while Reliance Industries has more or less met expectations, albeit with huge forex transaction gains, rather than operating income.

Technically, equity continues to looks bullish with a series of successive 2016 highs. The Nifty is hitting resistance above 8,500, it hit 8,600 but it could not sustain. Every trend following system would suggest staying long until there is a clear trend reversal. But, in practical terms, news flow will continue to be the driver.

FIIs have bought equity in July (so far). Domestic institutions have been net sellers however. The breadth has been good since retail is strongly bullish. The monsoon has, so far, offered a boost to sentiment. This may translate into a revival of the IPO market.

In the Nifty Bank, resistance at 19,175 has been tested unsuccessfully. Trend followers will stay bullish though the uptrend in the financial index looks to have weakened a little. A long July 28, 18,600p (105), long July 28, 19,200c (121) costs 226. This is roughly zero-delta with the Nifty Bank spot at futures held at about 18,925. This long strangle costs 226 and it could go into profit with just one big sessions. There's ample time to expiry. A calendar spread may be created by selling the July 21, 18,600p (30), July 21, 19,200 (47). If this short strangle is not struck, the premium inflow of 77 boosts overall returns. If it is struck, the long strangle should also gain to offset the short-losses.

The Nifty July call chain has good open interest (OI) till 9,000 though the OI peaks at 8,600c. In the Nifty put chain for July, there's good OI till 7,400p, with big peaks at 8,000p and 8,400p. Put-call ratios remain bullish at 1.1.

A bullspread with long July 8,600c (45), short 8,700c (19) costs 26 and pays a maximum 74. This is 90 points from money. A bearspread with long 8,500p (72), short 8,400p (41) costs 31and pays a maximum 69. This is just 10 points from money. There is a promise of high volatility continuing. There could be a steeper uptrend next week if central banks do deliver. But, there may also be a sharp trend reversal if traders are disappointed by central bank action or by a Parliamentary log-jam.