Stay long on Nifty with stop at 10,150

The market hit new highs on the back of the massive recapitalisation plan. Bullish global trends also helped to keep sentiments high. The Nifty hit a high of 10,340 before seeing profit booking. Although FPIs (foreign portfolio investors) didn't really buy in meaningful quantity, retail and domestic institutional buying in PSU banks pushed the market to new highs.

Obviously, the new highs confirm the long trend remains bullish and momentum may have accelerated. However, this is a new zone so, target setting is near-impossible. Depending on levels of optimism, any target between 10,400 and 10,650 could be hit. The movement was narrow - every listed PSU bank saw double-digit bounces, but there was selling across NBFCs and in several private banks.  

The bounce started from support at 9,675-9,700, which has held on the last two downtrends. Trend following systems suggests staying long, with a trailing stop-loss at 10,150. The Advance-Decline ratio is positive but narrowly so. The VIX is in calm territory.

The 200 Day Moving Average is around 9,300, 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 10,340 in late-October. It has bounced twice from 9,675. The successive new highs indicate strong momentum, while the market should stay above 9,675 on the next downtrend. In the short-term, profit-booking should find support at 10,150-10,175. 

The Nifty Bank had been less bullish than the overall market until this plan was unveiled. It's worth noting that PSU banks have very low weights in the Nifty Bank and as mentioned above, high-weighted private banks saw selling. ICICI Bank was the only private bank that saw strong buying. However, Punjab National Bank (PNB) gained nearly 50 per cent and State Bank of India (SBI), Bank of Baroda, Canara Bank, all saw moves of over 25 per cent.

Going into the settlement and over the next few sessions, there could be some profit-booking in PSU banks and short-covering in private banks. The Nifty Bank index is still trending below its all-time high of 25,200. We'd expect it to breakout beyond that. Short-covering in heavyweight private banks would lend some upwards momentum to counter profit booking in PSUs. 

A strangle of long November 30, 26,000c (125), long November 30, 24,000p (142) costs around 267. This is near zero-delta with the index at 25,025. The trader could sell short November 2, 26,000c (36), short November 26, 24,000p (32) costs 68. So, the net strangle position with calendar spreads costs about 200. It could have a big payoff if the financial index remains volatile through November.

The Nifty's Put-Call Ratio is not very useful this close to a settlement. 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 10,295 on Tuesday. A bullspread of long November 10,400c (100), short 10,500c (61) costs 39 and pays a maximum 61. This is about 100 points from money. A bearspread of long 10,200p (96), short 10,100p (70) costs 26, pays a maximum of 74 and is also 100 points from money. 

These spreads are zero-delta. Combined, the resulting position costs 65, with breakevens roughly at 10,135, 10,365. One or the other position is almost sure to be hit in the new settlement. As always, a gutsy trader could sell these spreads for a couple of sessions and reverse on Monday. There should be some gains unless the market zooms or crashes.  

Corporate results were ignored today but those will continue to be triggered. The sentiment is upbeat so any upside surprises will be greeted with buying.