Weakness in Nifty Bank could hurt bullish trend in Nifty

The long-awaited GST constitutional amendment Bill passed and the market has moved up since. Raghuram Rajan chairs his last policy review at the Reserve Bank of India (RBI) on Tuesday. That ends the series of major central bank meetings after Brexit. Meantime, first quarter results continue to come in.

The next phase of the GST could be as tricky in legislative terms but market watchers now assume it will pass through a majority of state assemblies and the April 2017 implementation target will be met. Only time will tell if that turns out to be true but the positive sentiment should keep the market buoyant.

The US Federal Reserve and the Bank of Japan both stood on status quo. RBI is also expected to maintain status quo but Rajan's last statement will be parsed for his take on economic direction. If there is a negative sounding statement or some central bank action is taken, the market could react with high volatility.

The earnings season has been fairly positive. Technically, the Nifty continues to look bullish since it has hit a sequence of higher highs and it hit a new 52-week high yesterday. Every trend following system would suggest staying long until and unless there is a clear trend reversal. In terms of targets, the optimists would hope that the run will last until the record high of 9,120 is broken. The Nifty could run up till the 9,000 level or higher in the next 10 sessions.

FIIs continue to be major net buyers of equity while domestic Institutions have been net sellers since June. The breadth has been good since retail is also bullish. A good monsoon has boosted sentiment.

However, in the Nifty Bank, resistance at 19,175 has been tested unsuccessfully and the trend looks a little more bearish. This is a mild danger signal since the Nifty Bank is often a lead indicator for overall sentiment.

A long August 25, 18,500p (113), long August 25, 19,500c (108) costs 221 in the Nifty Bank. Since the index is at 18,940, this long strangle could be struck given two big sessions in either direction. The trader could sell the August 18, 18,500p (43) and the August 18, 19,500c (52), this short strangle pulls in 100. If this short strangle is not struck, the premium inflow reduces potential losses on the long strangle. If it is struck, the long strangle would gain enough to offset short losses.

There is good open interest (OI) in the Nifty August call chain till 9,000, where the peak open interest (OI) is seen. In the Nifty put August chain, there's good OI till 7,500p, with big peaks at 8,000p, 8,500p and 8,600p. The Nifty is currently held at 8,720, with a small premium of 20 on futures over spot. The put-call ratio (PCR) is on the edge of bearish territory. The August PCR is bearish at 0.98, while it's neutral for the 3-month set at 1.05.

A bullspread with long August 8,800c (69), short 8,900c (35) costs 34 and pays a maximum 66. This position is 80 points from money. A bearspread with long 8,700p (79), short 8,600p (48) costs 31 and pays a maximum 69. This is only 20 points from money. Obviously the bearspread looks more attractive since it's practically on the money. But, the skewed risk-returns from these spreads indicate how optimistic traders are.

The market looks set to continue to trend upwards, barring unexpected news flow and some sort of change in the current optimistic global sentiment. It is hard to set targets on the upside but the optimists will hope for new all-time highs before the trend loses momentum.