Nifty scales 10,600 for first time: Budget, results key factors ahead

The Nifty broke out past 10,600 on Monday, hitting a new high. There was buying coming in even above the 10,600 level. This beats the last all-time high of 10,552. The long trend obviously remains bullish. The first level to watch for bears would be around 10,550, which was the earlier high and should now be the first support. If that is broken, there’s support at every 50 points or so down. The key recent support would be at 10,325.

The January settlement is extremely important for several reasons. The first is, it will give us an inkling of foreign portfolio investor attitude in a new financial year for them. So far, they have been heavy buyers. The second key factor is that the Budget on February 1, has started being discounted during this settlement. More fundamental data would also be coming in.

The third important factor is, corporate earnings season and market responses to results. If GST has settled down somewhat, corporate earnings should grow quickly in October-December 2017, because quarter 3, 2017-18 should gain from a low base effect, given that October-December 2016 was weak.

By definition, the long-term and intermediate trends are up. Trend following signals suggest keeping a buy on the Nifty with a stop at 10,500. The VIX stabilised at lower levels and it is rising again.

Foreign portfolio investors (FPIs) were net sellers in December but net buying from domestic institutions was more than the quantum of FPI selling. In January, FPIs have been buyers while domestic institutions have been net sellers until Monday. Traders must remain braced for currency volatility due to Brexit. Worries about higher oil prices have been accentuated by turmoil in Iran, which causes fear of supply disruption. The dollar has lost a lot of ground - a rebound could be on the cards but that's unlikely to happen if FPI money keeps flowing in.

This bounce started from support at 9,675-9,700. The 200-Day Moving Average is around 9,850-9,900. In the longer-term, the Nifty moved North in December 2016 from 7,900 levels to a high of 10,550, twice in December 2017, before moving to the current high of 10,630. The Index has bounced twice from 9,675 since December 2016.

The Nifty Bank has rebounded less strongly than the Nifty. The "Bank" is currently at 25,700-levels after falling from a high of 25,953 and bouncing from 24,620. A strangle of long January 25, 26,500c (29), long January 25, 25,000p (72) costs 101. This position is nearly zero-delta. it would take three big trending sessions for one side to be hit.

A trader could take this and sell short January 11, 26,500c (10), short January 11, 25,000p (24) to reduce net costs to 67, if the short strangle expires without being hit. This net long-short position could give a big payoff if the financial index stays volatile.

The Nifty's Put-Call Ratios (PCR) are bullish with the PCR at 1.3 for January. The Nifty closed at 10,623 on Monday. A bullspread of long January 10,700c (62), short 10,800c (28) costs 34 and pays a maximum 66 and this is 80 points from money. A bearspread of long January 10,600p (88), short 10,500p (58) costs 30, pays a maximum of 70 and is only 23 points from money. The premium asymmetry indicates the optimistic sentiment.

The short-term trading view is also bullish but there could be some profit-booking at the current levels. In that case, the bearspread's risk:reward Equation looks quite favourable.

Historically, the market tends to be optimistic going into a Budget so, it's reasonable to expect the surge to continue through the next three weeks of the settlement. Corporate results could cause sudden volatility however.