Nifty: Close above 9,700 key for upmove

The market continues to range trade. The Nifty has not been able to sustain above 9,700 but it has also found support at 9,575. This narrow range trading may not last too long. Traders discounted the US Fed's rate hike as expected. Even the statement which indicated how the Fed intends to taper has not caused much anxiety.

Traders are seeking news triggers and clarity on issues like the Brexit format, GST, the Qatar crisis among others. The French parliamentary elections results were welcomed however. As of now, most traders are assuming that the Reserve Bank of India will cut policy rates soon, given low inflation in May. All institutions, domestic and FPIs, remain net buyers in June. Retail is also positive. 

As of now, the trend would still be counted as positive across all timeframes. However, the market has narrowed with declines exceeding advances in the last session and a lot of late selling on Monday. European strength could induce more positive sentiments however. Since the support held at 9,550-9,575 despite several tests, that range is critical. If that support breaks, with say, a close at 9,500 or below, the index could easily dip till 9,350-9,400. Trend following systems suggest staying long in the Nifty futures with a stop-loss at about 9,500.

On the upside, the index must beat 9,709 and close above 9,700 in order to maintain its pattern of higher highs. Beyond that, it's new territory and target-setting will be inaccurate until some history builds up on the higher side.

The VIX has gone very low, which implies trader confidence. The put-call ratios are also well above 1.1 indicating comfortably bullish sentiment. The advance-decline ratio did go into negative territory for a few sessions. The dollar-rupee rate has remained stable.

The index started moving North in late December from 7,900 levels. It has gained over 22 per cent since then. The length of this current move (in terms of time) and the magnitude of gains indicate that the next intermediate correction could also be severe. A dip till 8,800 is possible in full-blown intermediate downtrend, the 200 Day Moving Average is in that range. 

The Nifty Bank saw a high of 23,806 but it has reacted, with selling late in the last session. A strangle of long June 29, 24,000c (63), long June 29, 23,000p (23) is asymmetric. The index is much closer to 24,000. But, either side of this strangle could be hit, given two trending sessions. The cost can be offset slightly by selling June 22, 23,000p (5), short June 8, 24,000c (20). If either short position is struck, the corresponding long position will gain.

The June Nifty call chain has peak open interest (OI) at 9,700c, and high OI at every strike until 10,500c. The June put chain has very high OI at every strike down to 9,000p and substantial OI below till 8,000p with peaks at 9,500p, 9,200p, 9,000p and 8,800p. Expiry effects are visible with premiums down. Hence, there's not much point in selling distant options.

The Nifty is at about 9,660. A strangle at 9,700c (44) , 9,600p (30) would breakeven at 9,775, 9,625, these strikes are almost equidistant from money. A long June 9,700c (44), short 9,800c (15) costs 29 and pays a maximum of 71. A long June 9,600p (30), short June 9,500p (13) costs 17, pays a maximum of 83. The bearspread is underpriced. 

The positions can be combined for a long-short strangle set. This costs 46, pays a maximum of 54 and breaks even at 9,746, 9,554. One side or the other may be hit in the sessions that remain.