Derivatives strategies: Strong resistance for Nifty in 10,700-10,800 zone

The market rebounded from a bottom (Nifty at 10,005), to hit a high of 10,645 this Monday before it fell again. Volumes were low with little institutional buying. Both FPIs (foreign portfolio investors) and domestic institutions were net positive but the quantum of buying was extremely small. Breadth looks poor, with advancing stocks outnumbered by declining stocks. Volatility is high. 

The major indices are all trading below respective 200 day moving averages (200-DMA) and those could serve as areas of resistance. Bond market yields have eased down. The rupee has recovered to Rs 72.90- 73/dollar. 

Corporate results have just about met expectations. Crude prices dropped in the last two weeks. India received a respite with a conditional waiver from US sanctions versus Iran. The US-China trade war continues but trade projections look better, given lower crude prices.

The Nifty hit its all-time high of 11,760 in late August and it retracted to a low of 10,005. The 200-DMA is currently trending at 10,750, so it has been completely broken. The rebound has set up rising peaks, which is a good sign, but it stopped well short of the 200-DMA. The Vix continues to run high, indicating fear is there. Session volatility is high, with session high-low ranges of near 1.5 per cent.

The downtrend lasted eight weeks and there was a 14.9 per cent retraction off the peak, before the 6 per cent rebound in the last two 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 when it next hits those levels. For sustainable bullishness, the index would have to move above the 200-DMA and ideally, beat 10,850. On the downside, a fall below 10,000, could mean a deep dive till 9,500-9,600 as a target. 

The Bank Nifty slid till 24,400, well below its own 200-DMA. The pullback went till 25,900 and its now back at 25,540. A long November 29, 24,500p (112) and a long 26,500c (69) has asymmetric premiums despite being almost zero-delta. It can be offset with a short November 22, 24,500p (50), short 26,500c (27). Net cost is 104. There could be a huge payoff if the financial index moves by 3.5 per cent. 

The Nifty is at 10,482. A long November 10,600c (103), short 10,700c (65) costs 38, and pays a maximum of 62. A long November 10,400p (111), short 10,300p (83) costs 28, and pays a maximum of 72. These are almost zero-delta. The trend seems negative.