Long-term trends continue to be positive

The new high on Monday confirms that the breakout last week was genuine. The move above 10,150 has come smoothly after the breakout from several weeks of range trading. Of course, this sets up a new phase in the bull market.

There is no upside target that can be stated confidently since we're in an entirely new zone. Trend following systems would suggest staying long, with a trailing stop-loss at around 9,975. A breakdown below 9,975 would mean a breakout failure and lead to another phase of range-trading. 

The breakout above 9,975 has however, led to projections that a move till 10,275 was possible. Well, that is barely 125 points, or less that 2 per cent away. The VIX has eased down as the index has moved up, backing the bullish move. Volumes also look good as FPIs bought on Monday on global cues. The advance-decline ratio was also very positive as retail and domestic institutions were also net buyers.

By definition,  the long-term trend is positive. The 200-Day Moving Average (200-DMA) is around 9,150, way below the current mark. Taking a longer-term view, the Nifty moved north in late December 2016 from 7,900 levels to a high of 10,137 in early August before it reversed and hit support at 9,685. Any move to a new zone is usually met with some serious profit booking. So, another bout of selling and steep correction cannot be absolutely ruled out yet. But, there will be strong support down at 9,975 level.

The Nifty Bank had reacted down from an all time high at 25,200 to 23,822 on August 10, before pulling above 25,000 again on the latest move. The financial index is also very likely to hit new all-time highs within a couple of sessions.

Two big trending sessions could push it till 25,500. The financial index is currently held at just above 25,050. Taking a bullspread with long September 28, 25,500c (50), short September 28, 25800 (15) costs 35. Another alternative is a calendar spread of long September 28, 25,500c (50) offset by a short September 21, 25,500c (8). The long call will gain proportionately if the short call is struck.

The Nifty PCR remains bullish at well above 1.3. The September Nifty call chain has peak open interest (OI) at 10,000c, very high OI at 10,100c and peak OI at 10,200c with high OI until 11,000c. The September put chain has very high OI between 9,700p and 10,200p, with high OI down till 9,000p. 

 

The Nifty closed at 10,153 on Monday. The current trend-following signals suggest buying Nifty with a stop-loss at 9,975. Anybody who sells into the rally should keep a stop at around 10,275.

Option traders must consider the near-the-money strangle of 10,200c (51), 10,100p (38) which costs about 89 with breakevens at about 10,010, 10,290. This is zero-delta and gives an idea of trader expectations and the asymmetrical premiums indicate the bullish sentiment.

A bullspread of long September 10,200c (51) short 10,300c (18) costs 33 and pays a maximum 67. This is about 50 points from money. A bearspread of long September 10,100p (38), short September 10,000p (21) costs 17, pays a maximum of 83 and is similarly 50 points from the money.

These spreads are zero-delta and they could be combined. The resulting position costs 50, with breakevens roughly at 10,050, 10,250. One side of this strangle set is likely to hit in the current settlement. Most traders will be looking at naked long positions however, in the hopes that the breakout will lead to a strong sustainable uptrend and successive new highs.