Derivatives strategies: Trend-following signals bullish

The 50-stock Nifty has moved between support at 10,450 on the downside and tested resistance at 10,900 unsuccessfully

The week started strong with the Nifty moving up on the back of steady buying. The last few sessions has seen the foreign portfolio investors (FPIs) changing stance and buying rupee assets. It remains to be seen if this is just rebalancing or a full attitude reversal after they have sold heavily through the past three months. However, newsflow about the Trade war and Iran sanctions, etc., could derail the move. Crude prices continue to rule high. 

The Nifty is now nearing the top of a trading range it has been moving within for several months. The renewed FPI buying could just take it into breakout territory. Background signals are reasonable. The VIX has fallen while the index has risen, which is a bullish signal. Volumes have improved a little. Breadth is better. Trend-following signals are long, indicating a buy with a stop-loss at 10,750.

The Nifty has moved between support at 10,450 on the downside and tested resistance at 10,900 unsuccessfully. The 200-day moving average (200-DMA) is right at 10,425-10,450. There's heavy resistance at 10,900-10,950. A breakout above 10,950 could take the index to a new all-time high. 

A breakdown below the 10,450 would automatically trigger a dip below the 200-DMA and might signal a full scale bear market. 

The FPIs attitude is key. Domestic institutions have been buyers throughout and retail has been bearish.

Rupee volatility will continue, after it hit a new all-time low and it continues to trade down. Given the technical position and market expectations of further hikes from the US Fed, the dollar will continue to gain but there could be short-term rupee strengthening. There's also a case for shorting the yen and also the euro.  

The Bank Nifty is at 26,700. A long July 26, 25,500p (38), long July 26, 28,000c (12) strangle could be hit in four or five trending sessions. This is cheap enough not to require offsetting by selling to create calendar spreads. 

The Nifty is at 10,850. A long July 11,000c (40), short 11,100c (18) costs 22, pays a maximum of 78 - this is about 150 points from money, or two trending sessions away, given an average swing of 112 points/session. A long July 10,700p (54), short 10,600p (35) costs 19, pays a maximum 81. This is also about 150 points from money. 

Both seem reasonable from the risk: reward perspective. Combining the two will cost about 41 and yield breakevens at 11,041 and at 10,659.