Derivatives strategies: Nifty must beat 11,000 for bull run to continue

The Nifty is range-trading close to its own 200-Day Moving Average (DMA). 

There is strong resistance at the 10,900-10,950 zone. Volumes are low with net institutional selling in January.

FPIs were net buyers in December. Domestic institutions were also net positive. Some cautious retail buying has been evident in January. Session volatility remains high. 

The Volatility Index (Vix) is edging up, which could signal nervousness. The rupee has made a big recovery to above Rs 70 versus the dollar.

Crude prices remain low and inflation is down. But there are political and geopolitical concerns. The US-China trade war continues. Donald Trump’s position looks a little shaky 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 suggests Q3 slowdown. Corporate results may provide the next set of triggers.

The Nifty hit its all-time high of 11,760 in late August and retracted to a low of 10,005. A rebound till the 10,800-10,900 level is definitely a positive. 
 

But the rising Vix indicates there is now some fear.

An eight-week downtrend led to 14.9 per cent retraction off the peak, before the rebound started in early December. There were high volumes when Nifty was last in the 10,900 zone and there is a lot of selling pressure to absorb.

For sustainable bullishness, the index must beat 11,000 and stay above that. But it has not been able to break out from the resistance between 10,900 and 11,000. It oscillated to below the 200 DMA, which is 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 27,300. A long January 31, 28,500c (55) and a long 26,000p (78) can be offset with a short January 17, 28,500c (10), short 26,000p (18). Net cost is 105. There could be a huge payoff if either break even is crossed around 25,895, and 28,105. That would require four big trending sessions.

The Nifty is at 10,776. A long 11,100c (75), short 11,100c (47) costs 28, and pays a maximum 72. A long 10,600p (96), short 10,500p (72) costs 24, and pays a maximum of 76. These are some distances from money but it’s a long settlement. The combination of these two spreads costs 52, with break evens at 11,052, 10,548.