Trend continues to be positive

The market hit new highs in June, with the Nifty moving above 9,700. But, there was a mini-correction that pulled the index down till support at 9,575-9,600. There is stress ahead of the US Fed's policy meeting.  

As of now, traders are assuming that the Reserve Bank of India (RBI) will cut policy rates soon, given a drop in the inflation rate in May. Consensus that the Fed may hike the US policy rate band has been discounted.

Domestic institutions remain net buyers in June. So, do foreign portfolio investors. Retail is also positive. However, selling this week tested support at 9,575. If that support breaks, the index could easily dip till 9,350-9,400.  As of now, the trend would still be counted, as positive across all timeframes.

Profit-booking in the short-term could transform into an intermediate downtrend if it leads to mass selling. The Nifty bounced from 9,575 on Tuesday. The index has to beat 9,709 in order to maintain its pattern of higher highs. Beyond that, it's new territory and target-setting will be inaccurate until some history builds up. On the downside, it would have to stay above 9,350 ideally. Trend following systems suggests staying long in the Nifty futures with a stop-loss at about 9,500.

The VIX has stayed very low, which implies trader confidence. The put-call ratios are also above 1.1 indicating a bullish market. The Advance-decline ratio did go into negative territory for a few sessions. The dollar could see swings if the Fed does something unexpected or even says something unexpected.

The index started moving North in late December from 7,900 levels. It has gained over 22 per cent. It's obviously bullish but the length of this current move (in terms of time) and the magnitude of gains both indicate that the next intermediate correction could also last a long time. A dip till 8,800 could be on the cards if there's a full-blown intermediate downtrend - the 200-Day Moving Average is in that range.

The VIX has stayed very low, which implies trader confidence. The put-call ratios are also above 1.1 indicating a bullish market. The Advance-decline ratio did go into negative territory for a few sessions. The dollar could see swings if the Fed does something unexpected or even says something unexpected

The Nifty Bank has seen a recent high of 23,710 but it has reacted, down to current levels of 23,500. A strangle of long June 29, 24,000c (56), long June 29, 23,000p (89) has asymmetric even though the positions are zero delta at the same distance from money. The higher put premium indicated greater bearish expectations.

Either side of this strangle could be hit, given two trending sessions. The cost can be offset slightly by selling June 22, 23,000p (29), short June 8, 24,000c (23). If either short position is struck, the corresponding long position will gain.

The June Nifty call chain has peak open interest (OI) at 9,700c, and high OI at every strike until 10,500c. The June put chain has very high OI at every strike down to 9,000p and substantial OI below till 8,000p with peaks at 9,500p, 9,200p, 9,000p and 8,800p. The Nifty is at about 9,620. A straddle at 9,600c (95), 9,600p (60) would breakeven at about 9,755, 9,445. Of course, the call is on the money.  A long June 9,600c (95), short 9,700c (45) costs 50 and pays a maximum of 50. This is 20 points in the money. A long June 9,600p (59), short June 9,500p (33) costs 26, pays a maximum of 76 and is just 20 points off the money. The bearspread seems underpriced. 

A strangle like the long 9,500p, long 9,700c costs 78. It can be offset by a short 9,800c (18), short 9,400p (19), which cuts 37 off for a net cost of 41. A combined long-short set of strangles pays a maximum 59, with breakevens at 9,459, 9,741. One side or the other is very likely to be hit.