Uptrend could take Nifty to 8,800 levels

The Monsoon Session of Parliament continues. So, does earnings season and negotiations about GST. But, major investors will be more focussed on news-flow from central bank meetings. The US Fed and the Bank of Japan (BoJ) are both due to make policy statements this week. The GST legislation is entering endgame: Either it passes in the Monsoon Session or it is effectively shelved until the next general elections. Obviously there will be a strong rally if GST does go through the Rajya Sabha.

It is possible that the Fed Reserve and the BoJ will both stand with status quo. But, in that case, traders will try and make sense of the statements. If there is an accommodative attitude from the central banks, a global rally will commence or rather, continue. Obviously, the Fed and BoJ stances would influence the Reserve Bank of India's attitude when Raghuram Rajan makes his very last policy statement in early August.

The early results in earning season have not been too positive. Revenues are flat, profits have expanded a little. But, net profit margins and operating margins are both lower than the margins recorded in Jan-Mar 2016. The information technology industry's numbers reveal margin pressure. Private banks have seen rising NPAs. Reliance and Maruti have relied on Other Income to generate higher profits. However, the Capital goods industry has done well.

Technically, the Nifty continue to look bullish, with a series of successive 52-week highs. The Nifty is testing resistance above 8,600. Every trend following system would suggest staying long until there is a clear trend reversal. In practical terms, news flow will continue to be the driver.

FIIs have bought equity in July, while domestic Institutions have been net sellers. The breadth has been good since retail has also seemed bullish since a good monsoon has boosted sentiment. If the uptrend continues, the Nifty could run up till the 8,800 level or higher in the next 10 sessions,.

In the Nifty Bank, resistance at 19,175 has been tested unsuccessfully. But, trend followers will stay bullish though the uptrend in the financial index looks to have weakened a little. A long August 25, 18,500p (161), long August 25, 19,500c (212) costs 374. This is roughly zero-delta with the Nifty Bank spot held at almost 19,000. This long strangle could go into profit, given two big sessions in the August settlement. A calendar spread may also be created by selling the August 4, 18,500p (40), July 21, 19,500c (55). If this short strangle is not struck, the premium inflow of 95 boosts overall returns. If it is struck, the long August 25 strangle should also gain commensurately to offset short strangle losses.

Open interest (OI) in the Nifty August call chain till 9,000, with a though the OI peaks at 8,600c. In the Nifty put chain for August, there's good OI till 7,500p, with big peaks at 8,000p and 8,500p.

In the immediate future, with the Nifty held at 8,610, the premiums in the July 8,600p (23) and July 8,600c (38) indicate that high volatility is not expected on settlement. The August 8,600p (110), 8,600c (169) costs 280 at the moment.

A bullspread with long August 8,700c (115), short 8,800c (74) costs 41 and pays a maximum 59. This is 90 points from money. A bearspread with long 8,500p (78), short 8,400p (54) costs 24 and pays a maximum 76. This is 110 points from money. There is a promise that high volatility will continue. There could be a steeper uptrend next week if the central banks do deliver. But, there may also be a sharp trend reversal if central bank action disappoints and there is a Parliamentary log-jam.