Upmove testing all-time high on the cards

The market has executed an upside breakout in the last five sessions and the move has gained momentum as well. Nervousness about a possible dollar hike has eased, as the latest US employment data is weak. There's been a string of new 52-week highs in the past few sessions and there's a good chance that the indices will soon move to new all time highs.

The breakout beyond resistance at Nifty 8700 set up an immediate target of 8,900-plus. That has now been comfortably beaten and the momentum looks good. Hence, a move that tests 9,120, the all time high registered in February 2015, is definitely on the cards.

In meantime, the rupee has strengthened slightly. Traders will be watching currency volatility like a hawk, given the reversal of somewhere between $20 billion and $34 billion of dollar-rupee swaps over the next three months. Government bond yields have dropped below the sentimentally important zone of seven per cent and this indicates the market is somewhat optimistic about possible rupee rate cuts. But, the rupee could be a target if it weakens during the swap reversal.

FIIs continue to be heavily net investors, while domestic institutions have also been buyers in the last week or so. Breadth has been excellent since retail is very bullish. A good monsoon has lifted sentiment. The earning seasons has been largely on expected lines but fairly bullish.

Technically, the Nifty has hit a sequence of higher highs and higher lows. The move above 8,900 is quite positive and the next big target must be 9,120. Every trend following system would suggest staying long now, with a trailing stop loss at least 150 points below entry price. The Nifty could run up till the 9,200 level or higher in the next 10 sessions. However, it could equally run down till 8,650 if it does reverse.

The Nifty Bank has pushed higher, as it usually does, given the high-beta relationship with the Nifty. The Financial index has already hit a new all-time high at 20,459. If the Nifty Bank and the Nifty maintain their normal relationship, this is a leading indicator that suggests the Nifty will soon pass 9,120.

The put-call ratios (PCR) are in very positive territory for both indices. The Nifty PCR is above 1.3 for both the one-month and the three month chains. The Nifty call chain now has significant open interest (OI) volume above 9,000 levels at strikes like 9,200c and 9,500c and good OI till 10,000c. The put chain has good OI down till 7,500p. The VIX is rising, which is understandable since premiums have risen with the breakout.

A long Nifty Bank September 29, 20,000p (147), long September 29, 21,000c (117) costs 264, with the index at around 20,425. One end of this long strangle could be struck given two big sessions in either direction. The trader could sell the September 15, 21,000p (47) and the September 15, 21,000c (35). This short strangle reduces overall costs by 82 if it expires without being struck. If it is struck, the long strangle will gain enough to offset short-losses.

The Nifty is currently held at 8,943. A bullspread with long September 9,000 (79), short 9,100c (41) costs 38 and pays a maximum 62. This position is 57 points from money. A bearspread with long September 8,900p (76), short 8,800p (47) costs 29 and pays a maximum 71. This is 43 points from the money. A combination of long 8,900p, long 9,000c, short 8,800p, short 9,100c, costs 67, with breakevens at 9,067, 8,833. The breakout has strong tailwinds driving it but the long-short strangle combination may make sense.