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The market has developed a bullish bias after the RBI released its monetary policy review. The market had already discounted the 25-basis-point rise in the repo rate and there was a relief rally due to some fears of a harsher rise. The lowering of the MSF was a positive factor since that eases liquidity in the banking system.
The market is assuming the US FOMC meeting would end by ratifying QE3 to continue till December at least. The shutdown, which slowed US recovery, and the dovish reputation of the new Fed chairperson has some traders betting on an extension of QE3 till March 2014.
The Nifty crossed the massive resistance at 6,230 and closed above it, while registering a new 52-week high. The next target would be the all-time high at 6,350-plus. Chart patterns suggest this mark could be beaten early into the November settlement.
The breakout past 6,230 implies that will now become at least a temporary support. The Nifty has traded quite extensively between 6,100-6,225 so that congestion zone should provide multiple supports on any profit-booking. On the downside, the 200-Day Moving Average (DMA) should be the benchmark of this bull-market's health. The 200 DMA is now above 5,850.
Given the registering of highs, the market is obviously bullish in the short and intermediate term. The move has been backed by most sectors and market breadth has been good, though volumes are low for the settlement week.
The Bank Nifty is intriguing. It has gained since the rally but is hitting massive resistance above 11,400. If it manages to move above 11650, it could push past 12,000. It may be worth taking a bullspread in the options market. A long November 12,000c (108) offset by a short 12,500c (40) costs 68 and could gain a maximum 432. The dollar could also be due for a bounce after the FOMC meeting ends. A pullback till 62.5 for the dollar is likely at some stage, it would happen probably on any session where the FIIs indulge in selling.
One set of speculative positions could be taken in the IT stock futures, given that corrections have occurred. Any upmove in dollar will lead to renewed bullishness in TCS and HCL Tech at the least. Another set of speculative positions arise in automobile stocks, there seems some consensus about recovery with Maruti, Bajaj Auto and Tata Motors all heading up.
The Nifty's put call ratios remain in the bullish zone though these are deceptive so close to expiry. Given bullish sentiment, Thursday could be a big session with lots of carryover. However, the strong supports around 6,200 restricts likely downside. A one-session gamble could be a long Oct 6,300c (14), this premium will jump if the index strikes 6,300.
November is likely to a fairly volatile. A movement of 500 Nifty points either way is not unlikely. Historically, there is often a sell-off after Diwali. But the FII support could alter that. A trader should brace for the Nifty to move anywhere between 5,700 and 6,700 in November and far-from-money spreads can be taken. One would not suggest selling options far from money because of the possibility of a big swing.
A bullspread of long Nov 6,400c (80) and short 6,400p (46) costs 34 and pays a maximum 66. A bearspread of long 6,000p (40) and short 5,900p (27) costs 13 and pays a maximum 87. It's better to avoid strangles till Monday because premiums will ease. This is why one has recommended a Bank Nifty bullspread instead.
