Nifty level of 10,650 or higher not ruled out

The market continued to hit new highs on the eve of the one-year anniversary of demonetisation. Global trends weakened somewhat however. The Nifty hit an intra-day high of 10,490 on Monday before it pulled back on profit-booking. FPI (foreign portfolio investors) buying is back but more than that, retail and domestic institutional buying is pushing the market to successive new highs.

Obviously, the new highs confirm that the long trend remains bullish and momentum looks good. However, this is a new zone so, target setting is near-impossible. Depending on levels of optimism, target of 10,650 or higher could be hit. The movement was somewhat narrower on Monday however.

The bounce started from support at 9,675-9,700, which has held on the last two downtrends. Trend following systems suggest staying long, with a trailing stop-loss now placed at 10,325. The Advance Decline ratio is positive. The VIX is in calm territory but it has spiked in the past two-three sessions which could indicate imminent profit-booking. 

The 200 Day Moving Average is around 9,500, way below the current mark. Taking a longer-term view, the Nifty moved North in late December 2016 from 7,900 levels to a high of 10,384 in late-October. It has bounced twice from 9,675. The successive new highs indicate strong momentum, while the market should now stay above 10,150 on the next intermediate downtrend. 

The Nifty Bank has been a strong driver after the bank recap plan. It's worth noting that PSU banks have very low weights in the Nifty Bank. The Nifty Bank index is now hitting successive highs just like the broader market. On Monday however, there was selling across the financial sector. Over the next few sessions, there could be some profit booking in energy as crude prices are considered to be hardening. This could also impact the rupee.

A strangle of long November 30, 26,000c (195.4), long November 30, 25,000p (165) now costs 360. This is near zero-delta with the index at 25,570. If a trader is taking this as a fresh position, he could sell short November 16, 26,000c (92), short November 16, 25,000p (69) to reduce the net costs to around 200. This net strangle position, with the long-short calendar spread could have a big payoff if the financial index stays volatile. Two or three big trending sessions would take this into the money. 

Corporate results have been better than low expectations and there is a low base effect versus July-September 2016 as well. Hence, results could continue to be upside triggers since the upbeat sentiment guarantees that positive surprises will be greeted with buying. The Nifty's Put-Call Ratio is comfortably bullish at around 1.4-1.5 The November Nifty call chain has peak open interest (OI) at 10,500c, and high OI until 11,500c. The November put chain has very high OI between 9,500p and 10,300p, with peaks at 10,000 and 10,200. 

The Nifty closed at 10,431 on Monday. A bullspread of long November 10,600c (62), short 10,700c (31) costs 31 and pays a maximum 69. This is about 170 points from money. A bearspread of long 10,300p (61), short 10,200p (45) costs 16, pays a maximum of 82 and is about 130 points from money. 
 

These spreads are not zero-delta and obviously the bearspreads are ore attractive in terms of risk:return. Combined, the resulting position costs 47, with breakevens roughly at 10,253, 10,647. One or the other position is looks sure to be hit in November. A gutsy trader could sell further from money, or buy one 10,500c (110), sell two 10,600c (2x62), buy one 10,700c (31). This would mean a net outflow of 17, and a maximum return of 83 just at 10,600, with profits anywhere between 10,518 and 10,682.