Derivatives strategies: A breakout above 10,800 would be a positive signal

The market continued to ride up. It is now testing resistance between 10,700 and 10,800. This zone is critical since the Nifty's 200-day moving average (200-DMA) is at these levels. A breakout above 10,800 would be a positive signal, with a possible upside till 11,000-plus. A crash would, on the other hand, have a downside till 10,300. Volumes have picked up with net institutional buying. FPIs are net positive while domestic institutions are selling. Breadth is negative, with advancing stocks outnumbered by declining stocks but it has improved. Volatility remains high. The major indices are all trading close to respective 200-DMA and those could be severe resistance zones. The rupee has recovered to Rs 71.90 per dollar.

Corporate results have just met expectations. The key factors for revival are lower crude prices and a stronger rupee. The trade war continues. Newsflow coming out of the RBI board meeting will be critical. The NBFC segment and debt-laden corporates could rebound if the RBI agrees to the government's demand to ease lending norms.   

The Nifty hit its all-time high of 11,760 in late August and retracted to a low of 10,005. The 200-DMA is currently trending at around 10,750. So, the rebound is now at those levels, which is a good sign. The Vix continues to run high, indicating fear is there.

The downtrend lasted eight weeks and there was a 14.9 per cent retraction off the peak, before the rebound in the last three weeks. There is strong resistance in the 10,700-10,800 zone. There were high volumes when the Nifty was last in that zone and there will be a lot of selling pressure to absorb.
 

For sustainable bullishness, the index would have to beat 10,900. Newsflow will be critical. A breakout above 10,900, or breakdown below 10,600 will set up an initial target of either 11,100, or 10,300 respectively. The Bank Nifty bottomed at 24,400. The pullback has now gone to 26,300-plus. A long November 29, 25,500p (80) and a long 27,000c (70) can be offset with a short November 22, 25,500p (30), short 27,000c (21). Net cost is 99. There could be a huge payoff if either breakeven is crossed at 25,400, 27,100. That would require three big trending sessions. Volatility is likely to spike in the banking sector.

The Nifty is at 10,763. Expiry effects are visible. A long November 10,900c (45), short 11,000c (20) costs 25, and pays a maximum 75. A long November 10,600p (50), short 10,500p (35) costs 15, and pays a maximum of 86. The combination would cost 40, with breakevens at 10,940, 10,560.