Moves beyond either 8,970, or below 8,650 on Nifty will define next trend

Global markets crashed on fears that the US Federal Reserve may hike rates at its policy meeting next week. But the consensus assumption is now that the Fed will maintain status quo. As far as Indian markets are concerned, the Nifty made an upside breakout about 10 sessions ago and the recent crash could help to define the next trend. The breakout beyond resistance at Nifty 8,700 set up an immediate target of 8,900-plus. That was comfortably beaten but the momentum reversed from 8,968. The downmove move has so far found support at 8,700, which is where the breakout started.

Those two levels (+/- about 50 points) are important. Assuming support at 8,650-8,700 holds, a bounce back to test the resistance at 8,970 may be expected. Moves beyond either 8,970-9,020, or below 8,650-8,700 should define the next trend. A breakout from these levels could swing till 8,400, 9,250 (the latter would be a new record high).

The rupee has strengthened slightly. Traders will be watching currency volatility, given the reversal of dollar-rupee swaps over the next three months. Government bond yields have stayed low. The latest consumer price data (which indicates a sharp drop in inflation) and the Index of Industrial Production (negative) bolsters hopes that the new monetary policy committee (MPC) could be prepared for a policy rate cut. The rupee could be a target for traders if it weakens during the swap reversal, or if the MPC takes unexpected decisions.

The last two sessions have seen selling by domestic and foreign institutional investors, but FIIs remain positive for September. Retail remained positive until the last two sessions. Technically, the Nifty continues to see higher highs and higher lows including a sequence of 52-week highs. So the long-term and intermediate perspectives are bullish.

The next big upside target must be the all-time record of 9,120. Every trend following system would suggest staying long, with a trailing stop loss at around 8,600 or so. The bullishness would intensify if the index crossed 8,970. However, if 8,650 is broken, drop till 8,450 is equally possible.

The Nifty Bank remains high-beta. It has hit all time highs last week (at 20,459) and it has reacted more. A long Nifty Bank Sep 29, 19,300p (129), long Sep 29, 2,030c (125) costs 254 and its zero-delta with the index at around 19,790. Either end of this long strangle could be struck, given two big sessions in either direction. The trader could sell the Sep 22, 19,500p (132) and the Sep 22, 20,200c (117). This short strangle pays 249 and cuts overall costs to only about five. If it is struck, the long strangle should gain enough to offset short losses.

The put-call ratios (PCR) are in positive territory. The Nifty PCR is at around 1.2 for both the one-month and the three-month chains. The Nifty call chain now has significant open interest (OI) above 9,000 levels at strikes like 9,200c and 9,500c and it has decent OI till 10,000c. The put chain has good OI down till 7,500p. The Vix is rising. The Nifty is at 8,715. A bullspread with long Sep 8,800 (77), short 8,900c (40) costs 37 and pays a maximum 63. This position is 85 points from money. A bearspread with long Sep 8,700p (89), short 8,600p (58) costs 31 and pays a maximum 69. This is almost on the money but technical signals suggest that the index is likely to trend up. A combination of long 8,600p, long 8,800c, costs 98 with breakevens at 8,500, 8,900. If this is offset by short 8,500p (25), short 9,000c (19), it seems quite attractive.