200-DMA breach indicates positive trend

Global sentiment continues to look strong. Investors are focussed on earnings season. Information technology (IT) bellwether, Infosys kicked off with excellent results last week. That boosted sentiment in the IT sector. Anyhow, the expectations for Q4, 2015-16 are not high which could mean gains. The indices have picked up on the basis of strong buying on Monday.

Several factors appear to be in place to support a bull-run. Even the bad news turned into good news for India traders! No pact was reached at Doha between oil-producers which means crude prices are slated to remain weak given the over-supply scenario. The IMF downgraded its estimates for World Economic growth and that was interpreted to mean more liquidity from central bank action.

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• Short-term signals are bullish
• Uptrend likely to last till RBI policy meet
• Big resistance at current Nifty zone of 7,500-7,650
• Nifty faces big resistance between 7,450 and 7,600
• Enormous resistances at Nifty 7,250-7,300 levels

 

The Nifty crossed the important barrier of the 200-Day Moving Average (200-DMA) on Monday and it closed above the indicator. This could indicate that the long-term trend has changed. The market had been bearish from March 2015 but the Nifty has now gained about 1,100 points from the Budget session low of 6,825. That is an impressive 16 per cent up in space of six weeks. Short-term moving averages like the 7-DMA, 10-DMA, 20-DMA, etc, are continuing to signal "buy". There could be some profit booking above these levels and we'll have to wait and see if the market stays above the 200-DMA. But, the trend does look positive. Breadth has been good and volumes reasonable. Domestic institutions have sold but the FIIs were big buyers through March and April (so far). The rupee continues to look strong against dollar. The predictions of good monsoons has reinforced positive sentiment with attention focussing on beaten-down FMCG stocks, tractor manufacturers, etc.

Infy usually sees a big move on results. It has hit new 52-week highs on Monday although some profit booking can now be expected. The movement there could also set up a positive trend in the IT industry though the results of TCS and HCL Tech will be crucial as well.

The Nifty Bank has seen some recent selling however. The financial index could pull down the overall market if PSU banks reveal more NPAs. However the index could also bust through current selling pressure if there are good results. As of now, a strangle of long 16,000p (140) and long 16,500c (120) looks quite tempting. This is approximately zero-delta, with the bank Nifty at 16,222 and either end of the strangle could be struck in one big session. Breakevens are at around 15,740, 16,760.

Open interest (OI) in the Nifty call option chain for April has a big peak at 8,000c and then tapers off but there is good OI until 8,200c. The April put option chain has big peaks at 7,500p and 7,000p. The Nifty's put-call ratios look bullish at about 1.2. The Nifty closed at 7,915 on Monday. A bullspread of long April 8,000c (41) short 8,100c (16) costs 25 and pays a maximum 75 and it's about 85 points from money.

The in-the-money spread of long 7,900c (88), short 8,000c is also acceptable. A bearspread of long 7,900p (72), short 7,800p (40) costs 32 with a maximum payout of 68. This is just about 15 points from money and therefore, looks very attractive!

A long-short strangle of long 7,800p (40), long 8,000c (41), short 7,700p (22), short 8,100c (16) costs 42 and pays a maximum of 57. The breakevens are 7,757, 8,043. This is not zero-delta but the two-way nature of the spread may be very useful, given the guaranteed volatility of the earnings season.