Derivatives Strategies: Bullish signals, target at 11,500-11,600

The Nifty has made a strong breakout from a trading range. This could mean a 5 per cent move over the next eight weeks. Since that period will coincide with the elections, this is likely to be heavily influenced by political news flow. 

The index has moved beyond 11,000 and held above it for three sessions. If this breakout is sustained, we’re looking at a target of 11,500-11,600.  

The background signals are bullish. Breadth has improved with a rally in small- and mid-cap stocks. Volumes have been good, with sustained buying from foreign portfolio investors (FPIs). Session volatility is low, and the Vix has fallen in the last few sessions. The rupee has not moved much in March. 

 

The currency trend has been strong due to FPI buying and stable crude prices. If the move is not sustained, the index may slide back into the trading range of 10,600-11,000. Market sentiment has ignored possible bad news such as poor macro-growth data out of India, China, US, and the European Union. 

The latest opinion polls suggest the Bharatiya Janata Party could retain power and that has definitely been a positive factor. The Nifty hit its all-time high of 11,760 in late August and it retracted to a low of 10,005. Since early December, the Nifty range traded between 10,500 and 11,000, before it made a failed breakout above 11,000, around the Budget session. 

On the subsequent reaction, it broke below the 200 DMA, which is now at around 10,900.  This breakout, above 200 DMA and the 11,000 resistance, looks strong, and the 200 DMA would be a strong support on a reaction. 

The Bank Nifty has also pulled close to 28,000, with market watchers hoping for more rate cuts from the Reserve Bank of India, if there are low inflation numbers released this week. A long Mar 28, 29000c (46) and a long 27000p (64) are equidistant. This strangle can be offset with a short Mar 20, 29000c (14), short 27000p (29) for a net cost of 67.  Either end of this could be struck in four trending sessions.

The Nifty is at 11,170. This is elections season and sentiment could change suddenly. A bull spread of long Mar 20, 11300c (36), short 11400c (13) costs 23 and it could pay a maximum of 77.  A long Mar 28, 11300c (76) , short 11400c (45) costs 31, and pays a maximum 69. A short Mar 28, 11000p (60), short 10900p (42) costs 18 and pays a maximum 82. These Mar 28 spreads could be combined for a net cost of 49, and net payoff 51.