 "8,500 and 8,700 are key Nifty levels to watch")
The new settlement starts on a note of nervousness, as the latest news out of the US Federal Reserve appears to indicate a rate hike could come faster than anticipated. In India, market watchers are still absorbing the implications of Urjit Patel's appointment. The new Governor will have to hit the ground running since the central bank must manage a reverse swap of around $34 billion starting September.
The market has remained range bound and been unable to breakout beyond resistance at 8,700 in the last few sessions. In fact, it has traded very narrow range through August and many traders are expecting a breakout to be followed by a 300-400 point move in the direction of breakout.
The Nifty has moved between 8,550 and 8,700 and the rupee has also been range bound. There has been some hardening of bond yields since Patel took charge but the rupee is now liable to come under pressure as the dollar hardens, first in response to Yellen's latest statement and then, the rupee could be specifically targeted as swaps start.
Technically, the Nifty has hit a sequence of higher highs and higher lows before flattening through August. Its inability to close above 8,700 could mean that the rally is finally running out of steam. A breakout (breakdown) from the range trade could mean move till 9,000-plus (8,300 levels). Every trend following system would suggest staying long until and unless there is a clear trend reversal.
In terms of targets, the optimists would hope that the run will last until the record high of 9,120 is broken. The Nifty could run up till the 9,000 level or higher in the next 10 sessions if it does break past 8,700. However, it could equally run down till 8,300 if it drops below 8,500.
In the Nifty Bank a minor breakout has already occurred with the index moving past resistance at 19,150 and the financial index is now testing resistances above 19,200. If the Nifty Bank and the Nifty itself maintain their normal relationship, this is a leading indicator that suggests the Nifty will break out upwards.
The put-call ratios are not very useful early into the settlement but they are in positive territory for both indices. The Nifty call chain now has significant open interest volume above 9,000 levels at strikes like 9,200c. The put chain has good open interest down till 7,500p. The VIX is low, which is understandable given the recent narrow trading.
A long Nifty Bank September 29, 18,700p (141), long September 29, 19,700c (162) costs 304, with the index at around 19,200. This long strangle could be struck given two big sessions in either direction. The trader could sell the September 8, 19,000p (84) and the September 8, 19,500c (85). This short strangle reduces overall costs if it is not struck. If it is struck, the long strangle will gain enough to offset the short-losses.
The Nifty is currently held at 8,607. A bullspread with long September 8,700c (89), short 8,800c (49) costs 40 and pays a maximum 60. This position is 93 points from money. A bearspread with long September 8,600p (100), short 8,500p (70) costs 30 and pays a maximum 70. This is on the the money. Obviously, the bearspread looks more attractive. The skewed premiums indicate how optimistic traders are. This could lead to panic if the market does break down.
