Derivatives strategies: Nifty level above 11,000 needed for bullish trend

The Nifty has range-traded close to its own 200-day moving average for the last month. The possible upside is till 11,100-plus, but there is strong resistance at 10,900-11,000 zone. Volumes continue to be low. 

Foreign portfolio investors have been net sellers through January and domestic institutions have been selective buyers. Breadth has been negative with third quarter (Q3) results not really making the market enthusiastic. Session volatility is low. But the Vix is edging up, which signals nervousness. The rupee has made some recovery in January. 

Crude oil prices remained stable though they have risen a little. Inflation is down. Political and geopolitical concerns remain though the focus is corporate results. The US-China trade war continues.  US President Donald Trump’s position looks shakier as investigations into his finances continue and the US Congress holds firm on not funding his wall. On the domestic front, the Rafale row continues. The macro-data and results suggest a Q3 slowdown with outperformances only from information technology on the back of a weak rupee in Q3. 

The Nifty hit its all-time high of 11,760 in late August and it retracted to a low of 10,005. The rebound till the 10,900 level is definitely positive. An eight-week downtrend led to 14.9 per cent retraction off the peak, before the rebound started in early December. The index has range traded between 10,500 and 11,000.  

For sustainable bullishness, the index must beat 11,000 and stay above that.  But it has not been able to break out and it has oscillated close to the 200-day moving average (DMA), which is at around 10,800.  If there’s a decisive break, say of 2 per cent in either direction off the 200-DMA, till either 10,600, or 11,000, that could be traded as a trend with some confidence. 

The Bank Nifty bottomed at 24,400.  The pullback has now gone to 27,600.  A long Jan 31, 28,500c (25) and a long 26,500p (38) can be offset with a short Jan 24, 28,500c (5), short 2,650p (7).  Net cost is 51. There could be a huge payoff if either breakeven is crossed. That would require three big trending sessions. As expiry gets closer, some traders might want the reverse positions. The danger is, unexpected corporate results in some bank may cause a big swing,

The Nifty is at 10,961. A long 11,100c (46), short 11,200c (20) costs 26, and pays a maximum 74. A long 10,800p (57), short 10,700p (37) costs 20, and pays a maximum of 80. These are some distance from money but one big session could mean a strike. The combination of these two spreads costs 46, with breakevens at 11,146, 10,754.