Nifty levels of 8,800-8,900 are possible

Global traders are relieved as both Greece and China appear to have stabilised. Lingering fears remain but an immediate crash looks unlikely. In India, the focus is more on the June Quarter  results, macro fundamentals and politics with Parliament going into session.

Midcaps and small caps are doing better than large caps. This is often an indication that retail investors are more enthusiastic than institutions. But as of now, the institutions are net buyers. Foreign institutional investors (FIIs) have been moderately positive in July, while domestic institutions have been moderate net sellers.

The Nifty has pulled above 8,600. Breadth was positive last week, with advances outnumbering declines. Volumes were on the low side. The gains indicate the trend is still bullish, although there was profit booking on Monday.

Q1 results are flowing in. Macro economic data of last week suggests the recovery is weak but the Index of Industrial Production has been positive from January. The Wholesale Price Index is running negative. But the Consumer Price Index has spiked to a year-on-year value of 5.4 per cent. Uncomfortably high, given a weak monsoon and high food inflation.

Given the Reserve Bank of India's (RBI's) stated target of six per cent or less YoY for December 2016, the central bank will probably not cut rates on August 4. But some optimists do feel a rate cut is possible. The Bank Nifty could be buoyed up by such hopes, although initial bank results (Federal Bank, for instance) have not been positive. The financial index could swing sharply up if there is a rate cut, since the market seems to have discounted the likely “no action taken” status quo by RBI. Expiry effects are visible across premia in the Nifty and Bank Nifty.

Infosys results could help establish a trend in the CNXIT. The response to TCS’ results was negative even though “consensus” was beaten. As of now, traders seem negative on Infy and on the information technology sector in general.

Political speculation will build up as the monsoon session of Parliament starts. The Vyapam scandal and Lalitgate seem to have pushed the BJP onto the back foot but optimists will hope some legislative action can be transacted on high-priority bills.

The Nifty has now registered and confirmed higher lows, suggesting the intermediate trend is positive. If the uptrend is sustained for a few more sessions, targets of 8,800-8,900 are possible, even given resistance at every 50-point interval. The next resistance is at 8,650.

The Nifty option put-call ratios (PCR) are healthy with 1.4 for the three-month PCR and 1.6 for July and nine sessions to expiry. Premia is showing an expiry effect with sharp falls away from money. The VIX has also dipped, indicating the fear of excess volatility has eased.

The Nifty’s call chain has three adjacent peaks across 8,600c, 8,700c and 8,800c, with ample OI till 9,000c. The put chain has high OI at every strike between 7,900p and 8,600p.  

The Nifty was held at 8,603 on Monday with the futures, 8,626 at a small premium. An on-the-money bullspread of long 8,600c (87), short 8,700c (40) is reasonably priced at 47 with a maximum payoff of 53. The long 8,700c and short 8,800c (15) costs 25, and pays a maximum 75. The on-the-money bearspread of long 8,600p (62), short 8,500p (33) costs 29 and pays 71, while a long 8,500p, short 8,400p (17) costs 16.  

A trader could take the on-the-money spreads or move one step away. If the trader has no directional view, a long 8,700c, long 8,500p, short 8,800c and short 8,400p, costs 41, and pays a maximum of 59 with breakevens at 8,741, 8,459.