Nifty 10,000 is a key support now

The Nifty has held on to 10,000 and zoomed higher. Bulls are likely to remain enthusiastic until the Credit Policy at the least. Corporate results are average — in fact Maruti was considerably worse than expectations. But, foreign portfolio investors (FPIs) remain net buyers, so do mutual funds and domestic institutions and so does retail.

The breakout has been sustained and by definition, the long-term trend is positive, given new highs. The US Federal Reserve decided to hold status quo which was a shot in the arm. The Fed is likely to start unwinding its balance sheet soon but that's being discounted.

The Reserve Bank of India (RBI) is widely expected to cut rates in its policy review. Low inflation and anaemic growth are factors that should trigger monetary easing. In fact, many optimists are hoping for a 50 basis point cut in policy rates. That's unlikely but a 25 basis point cut is likely. The dollar-rupee rate remains stable but forex markets could get choppy since the euro is hardening and the pound has been swinging sharply.

If RBI doesn't cut rates, there will be some unloading. Apart from this, geopolitical considerations such as the continuing face-off with China, or some other overseas trigger could lead to change in sentiment.

The short-term trend bounced from support at 9,450 in late June. Since then, it's been a pretty one-sided trend with successive resistances broken. The Nifty pulling above 10,100 means that 10,000 level is a key support now.

The index moved North in late December 2016 from 7,900 levels. It has now hit an all-time high of 10,115. The length of this current move (in time and magnitude) indicates the next intermediate correction could be severe. The first Fibonacci level is at around 9,250-9,300 and a dip till 8,850-8,890 may occur in the next intermediate downtrend.

Simple trend following systems suggest staying long in the Nifty futures with a stop-loss at about 9,950. The VIX remains low but its risen a little, indicating traders are slightly nervous. Put-call ratios are at overbought zones but not so useful this soon in a new settlement.

The Nifty Bank has also broken out to a new high. It's above 25,000. The August settlement is quite long and a swing till 24,000 or till 26,000 could occur if there are three big trending sessions. A strangle of long August 31, 26,000c (90), long August 31, 24,000p (88) is not quite zero-delta, with the index at 25,100. Either side of this strangle could be hit in the five-week long settlement. This position is relatively cheap. It can be offset with a short August 10, 26,000c (24), short Aug 10 24000p (20).

The August Nifty call chain has peak open interest (OI) at 10,500c and high OI until 11,500c. The August put chain has very high OI at 9,800p, with high OI all the way below, till 9,000p. The Nifty closed at 10,103 on Monday.

A bullspread of long August 10,200c (75) short 10,300c (42) costs 33 and pays a maximum 67. This is 100 points from money - less than 1 per cent away. A bearspread of long August 10,000p (88), short August 9,900p (62) costs 26, pays a maximum of 74 and is also 100 points from money.

The spreads could be combined for a zero-delta long-short strangle position. That would cost 59, with breakevens roughly at 9,940, 10,260. One side is very likely to be hit. A naked straddle - long 10,100c (122), 10,100p (122) costs 244 and has breakevens at 10,344, 9,856. That can be offset with short options as well and of course, it will be hit for sure.