Derivatives strategies: Strong resistance at the 10,900-10,950 zone

After an extremely volatile fortnight, the Nifty has made a breakout above the 200-day moving average ( 200-DMA) and seems to have consolidated above that point. 

The possible upside is till 11,100-plus but there seems to be strong resistance at the 10,900-10,950 zone. Volumes have picked up with net institutional buying. 

FPIs have been net buyers in December and domestic institutions are also net positive. Breadth still remains negative, but advancing stocks are edging close to declining stocks as retail has also cautiously returned. Session volatility remains high but the Vix has fallen. The rupee remains weak at Rs 71-72 versus dollar. 

The key factors for revival are lower crude prices, and falling inflation. The US-China trade war continues but the two nations are still negotiating. The market has weathered disappointment in the Assembly elections and welcomed the appointment of Shaktikanta Das as Governor. The Federal Reserve's Policy Review this week could be the next big news event. 

The Nifty hit its all-time high of 11,760 in late August and it retracted to a low of 10,005. A rebound till 10,900 is definitely a positive signal. The falling Vix indicates there is now less fear in the market. 

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

For sustainable bullishness, the index must beat 11,000 and stay above that. Newsflow will be critical. If the Fed is hawkish, there could be a reaction. But there would be support in the 10,350-10,450 zone even if there's a pullback below the 200-DMA. The index could go through a trading range of 10,500-11,000 in that case. 

The Bank Nifty bottomed at 24,400. The pullback has now gone to 27,000. A long December 27, 26,000p (77) and a long 27,500c (85) can be offset with a short December 20, 26,500p (28), short 27,500c (27). Net cost is 107. There could be a huge payoff if either breakeven is crossed at approximately 27,607, 26,393. That would require two big trending sessions. 

The Nifty is at 10,888. A long 11,100c (52), short 11,100c (24) costs 28, and pays a maximum 72. A long 10,800p (52), short 10,700p (33) costs 19, and pays a maximum of 81. These are near the money. The combination of these two spreads costs 47, with breakevens at 11,047, 10,753.