Nifty 9,800-9,825 level a key support now

The index hit new highs and climbed past 9,900 and closed above that level. Bulls continue to be enthusiastic and lukewarm initial corporate results have not deterred them. Institutional attitude is interesting. The foreign portfolio investors (FPIs) have been modest buyers in July and domestic institutional investors have bought around Rs 3,000 crore.

The market has been low-volume so this has been enough to trigger a breakout and sustain the uptrend. By definition, the long-term trend must be positive. The lack of volume expansion on breakout is usually a negative signal. Ideally, volumes will pick up on the breakout.

The Fed, the Bank of Japan (BoJ) and the ECB have policy meets coming up and corporate results are also flowing in. The market response has been good so far. The unwinding of the Fed's balance sheet may also be on the agenda but the Fed's mood seems to have softened and optimists are expecting no further hikes. The ECB is sounding somewhat hawkish however. The BoJ is apparently prepared to maintain a loose policy. Apart from raising rates, the ECB may taper the ongoing bond-buying QE since inflation is picking up in Europe.

The Reserve Bank of India (RBI) will take note of whatever happens before it takes a call at its policy meet in early August. The dollar-rupee rate remains stable as of now but forex markets could get choppy. Consensus expectation is that RBI will cut policy rates in August and loosen up. Soft June inflation numbers and poor IIP data could obviously influence that decision.

The short-term trend most recently bounced from support at 9,450 and the Nifty is now above 9,900, maintaining a pattern of higher highs. The 9,800-9,825 level is a key support now — a pullback below that level would mean the latest breakout is aborted.

The index moved North in late December 2016, from 7,900 levels. It has now hit an all-time high of 9,928. The length of this current move (in both time and magnitude) indicates that the next intermediate correction could be severe. The first Fibonacci level is at around 9,200 and a dip till 8,850-8,890 is possible if there's a full-blown intermediate downtrend.

Simple trend following systems suggest staying long in the Nifty futures with a stop loss at about 9,725-9,750. The VIX remains low, indicating traders are not nervous despite the record levels. Put-call ratios are very high at 1.8. In fact, these are overbought zones. That could signal a short-term correction.

The Nifty Bank has finally broken out to a new high, backing the Nifty. It broke out above 2,400- on Friday. The July settlement could still see either 23,500 or 24,500 hit. A strangle of long July 27, 24,500c (43), long July 27, 23,500p (58) is almost zero-delta. Either side of this strangle could be hit, given two trending sessions. This position is relatively cheap.

The July Nifty call chain has peak open interest (OI) 10,000c and high OI until 11,500c. The July put chain has very high OI at 9,800p, with high OI below, till 9,000p. The Nifty closed at 9,915.

The straddle at 9,900c (79), 9,900p (48) shows how bullish the market is since both options are on-the-money. Premiums seem underpriced overall. A bullspread of long 10,000c (32) short 10,100c (11) costs 21 and pays a maximum 79. This is 85 points from money, about 0.9 per cent away and there's 10 sessions till expiry in a raging bull-market. A bearspread of long July 9,900p (48), short July 9,800p (25) costs 23, pays a maximum of 77 and this is just 15 points from the money. Both these spreads seem quite underpriced since either could be fully realised on a single big session.