Move past 8380 would be positive

 

The market has inched up over the past few sessions after the Nifty and Sensex hit resistance near their respective 200-Day Moving Averages (200-DMA). There are signs that the rally might be running out of steam. Globally, traders are also betting that the US Federal Reserve will not raise America's policy rate in calendar 2015 due to soft macro-economic data in the US, China and other regions. This has released a new flood of liquidity and risk-on sentiment.

However, the market is still not definitively back in bullish territory. In technical terms, the indices have not been able to break out above the 200-DMA. The consensus among large brokerages is that majors are likely to report weak earnings in the September quarter. That could be a negative driver, if it turns out to be true.

The Nifty has seen a pattern of higher lows with a low of 7,691 (September 29) versus a prior low of 7,539 (September 8). But, the rally has hit heavy resistance at 8,200-plus. The exponential 200-DMA is at  8,180 and the simple 200-DMA is at 8,380 and the index has been moving in that 200-point zone in-between. A climb above 8,380 would be very positive. Otherwise, this might have to be written off as an intermediate rally within a bear market.

Other technical signals are puzzling. Advances have marginally outnumbered declines in the past fortnight and the net institutional position is positive in October. So far, the foreign institutional investors (FIIs) have been net buyers in October after two months of heavy selling but the domestic institutions have pulled back and so has retail. This is normal during the lead up to Diwali.

The rupee has seen a pullback till above 65. The forex market is liable to stay very volatile. The results and forecast from Infosys and results from TCS have not pleased the market much and this could mean a negative impact on the entire information technology sector.

 

The Bank Nifty has pulled back above 17,500 but has also had choppy trading action. A long 18,000c (203) and long 17,500p (127) costs 320, with the index held at about 17,850. This strangle would hit breakeven at about 17,180, 18,320. Either end could be hit in two big trending sessions with settlement on October 29. The brave trader may consider selling this, if he thinks volatility will not rise. The BankNifty's put-call ratios look positive at the moment.  

The Nifty's put-call ratios (PCR) are positive at about 1.26 (October) and above 1.3 (three-months). The call chain for October has high peaks at 8,200c, 8,300c, 8,400c, with a drop in open interest after 8,600c. The October put chain has big open interest (OI) peaks at 8,100p, 8,000p, 7,800p and 7,400p.

The Nifty traded at 8,275 on Monday. Expiry effects are becoming visible now. Close to spot, the trader can look at a bullspread of long 8,300c (60), short 8,400c (24). This has a maximum payoff of 64, with a cost of 36. It's just 25 points from the spot.

A bearspread of long October 8,200p (49), short 8,100p (27) costs 22 and pays a maximum 78 and this is 75 points from spot. These two spreads can be combined. But the risk:reward ratio is negative with possible payoffs of 42 versus costs of 58. A wider set of strangles can be taken with long 8,400c, long 8,100p, short 8,000p (15), short 8,500c (7). This costs 28 and it has a maximum payoff of 72, with breakevens at 8,072, 8,428.