Nifty 8,550 and 8,750 are two critical levels

The market bounced, one session prior to the Reserve Bank of India (RBI) Policy Review. There's some optimism, with many traders hoping for a rate cut. However, most of the smart money believes that RBI will hold status quo.

The bounce on Monday pulled the Nifty back to the levels it was at, before the crash triggered by the "surgical strike". The second presidential debate on next Monday could also influence movement. Going by global market sentiment, Hillary Clinton is the preferred candidate. The ongoing spectrum auctions are also being watched with great interest. This is the first review led by Urjit Patel and the first where the new Monetary Policy Committee calls the shots.

The Nifty found support at 8,550. The bounce has pulled it back to test resistance at 8,750 level. These two levels are critical. A drop below 8,550 could take the Nifty below 8,400. A rise above 8,750 could take it to 8,950.

The Nifty has described a pattern of lower lows, the previous low was 8,689. This has bearish implications. But, it could be just one blip given that it was a kneejerk response to news flow. On the upside, the index would have to move above 8,970 to create a pattern of higher highs, which would maintain the bullish trend that has been in force since March 2016.

 

A bounce above 8,970 could be expected if the RBI does cut, or even if the RBI statement is interpreted as positive in intent. A breakout to above 8,970 may have enough momentum to go till 9,250 (a new record high).

Rupee volatility will remain a factor since $26 billion of dollar-rupee FCNR swaps is to be reversed. Government bond yields have stayed low, partly on strong foreign portfolio investor buying and partly on RBI 's Open Market Operations (it is swapping dollar and buying bonds to release the rupees received back into circulation). The rupee could become a target if the Monetary Policy Committee takes unexpected decisions.

FPIs remain hugely for September with over Rs 20,000 crore (debt + equity), which implies that FPIs are hoping for cuts. Retail remains positive. Technically, we'll have to assume that the long-term and intermediate perspectives are bullish, until and unless the Nifty breaks down till below 8,550 again.

The Nifty Bank remains high-beta and it is hyper-sensitive to the monetary policy. After hitting all-time highs (at 20,459), it has reacted to hit support (at 19,050). As of now, the Nifty Bank is at around 19,600. A long Nifty Bank October 27, 19,100p (196), long October 27, 20,100c (208) costs 405. Either end of this long strangle could be struck, given two big sessions in either direction in October settlement. Traders could also sell the October 13, 19,000p (80) and the October 6, 20,000c (107). This short strangle cuts overall costs down by 187. If it is struck, the long strangle should gain enough to offset short-losses, even though the short strangle is closer to money. The Nifty call chain has a huge spike in open interest (OI) at 9,000c, with big OI at 9,200c and 9,500c and it has good OI till 10,000c. The put chain has maximum OI at 8,600p. The put-call ratios are below 1, this may indicate an undercurrent of bearishness.

The Nifty is at 8,738. A bullspread, with long October 8,900 (68), short 9,000c (38) costs 30 and pays a maximum 70. This position is about 160 points from money. A bearspread with long October 8,700p (97), short 8,600p (69) costs 28 and pays a maximum 72. This is only 40 points from money. So, it is much more attractive.