Nifty breaches 11,000: Brace for a lot of volatility in the new zone

The Nifty has broken out past 11,000. High hopes about the Budget, coupled to huge portfolio inflows, have been the drivers for this uptrend. The long trend is bullish but centred on newsflow about the Budget. It's impossible to calculate upside targets since the market is in a new zone.

The VIX is signalling a possibly serious correction. It has risen to 12-month high. However, a pullback would not be considered serious unless the Nifty slid below 10,550, which is the level where the recent breakout came. If that is broken, the next key support would be at 10,325. 

The next two weeks will see a lot of volatility. This is the BJP's last Budget before the next General Elections. Growth seems to be picking up but so is inflation. The GST has not yet settled down and the Fiscal Deficit is likely to exceed targeted levels. There are the usually sequence of rumours about changes in tax policy, etc. Investors and traders will as usual, subject the Budget to micro-analysis and this is traditionally an extremely volatile phase.

Devangshu Datta

So far in calendar 2018, domestic institutions, FPIs and retail investors, have all been strongly bullish. This has resulted in a broad movement across most sectors and smalls caps as well as mega-caps. Corporate earnings in Q3 appear to have been good. By definition, the long-term, intermediate and short-term trends are up. Trend following signals suggest a buy on the Nifty with a stop at 10,800. 

Traders must remain braced for currency volatility due to Brexit among other factors. Worries about higher oil prices continue - this has led to a larger Current Account Deficit. The dollar has lost a lot of ground. A rebound may be due but it's unlikely until there's a pause in FPI inflows. 

This particular uptrend started from support at 9,675-9,700. The 200-Day Moving Average is now around 9,950. 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 11,110. The Index has also bounced twice from 9,675, since December 2016. 

The Nifty Bank has also pulled up sharply. The "Bank" is currently at 27,400-levels after bouncing from 24,620. A strangle of long February 22, 28,500c (175), long February 22, 26,400p (205) costs 380, with breakevens at roughly 26,000, 28,900. This position is nearly zero-delta. It could be hit in four big trending sessions. If this is taken and the February 1, short 26,400p (72) and February 1, short 28,500c (86) is sold, the calendar spreads costs a net 222. This long-short position could give a big payoff if the financial index stays volatile. It's important to note that February 1 is Budget day, so there will be excess volatility at that settlement. 

Put-Call Ratios are not useful this close to settlement. The Nifty closed at 11,086 on Thursday. A bullspread of long February 11,300c (117), short 11,400c (86) costs 31, pays a maximum 69. This is 220 points from money. A bearspread of long February 10,900p (131), short 10,800p (104) costs 27, pays a maximum of 73 and is 180 points from money.  

This wide strangle is tempting only because the Budget guarantees big swings. Traders can take the inverse position for a couple of sessions to try and profit from premium decay at settlement. They may also sell options closer to money and reverse by Friday, hoping for a quick profit. For example, the short February 11,200c (157), short February 11,000p (163) will see premium decay if neither option is hit by Friday. However, there is addition al risk due to the impending the Budget.