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The market registered successive new highs on the past two trading sessions. The Bank of Japan's surprise decision to infuse extra liquidity has turbocharged overseas buying. Global markets were mostly up through last week.
By definition, a market trading at new highs is bullish. This also means that there are no benchmarks for judging potential resistances and possible targets. The nearest support levels are in the zone of Nifty 8,150-8,200, where the previous all time highs were registered.
The turnaround in FII attitude has been the key to this stunning reversal. The first two weeks of October saw heavy net selling by FIIs. However, the FIIs started buying in the last week of October and continued buying on Monday.
We are still in the post-Diwali period, when domestic volumes are traditionally on the low side. As retail and local operators come back into action, volumes should improve and the rally could be sustained to higher levels with strong domestic support.
Meanwhile, the dollar is hardening against the euro and yen. There has been a big bond market rally pulling US treasury yields down. Unsurprisingly, Japan's equity indices have also zoomed, while the yen has weakened. Other global markets saw more mixed trends with Chinese and European GDP data looking bearish. The Nifty and the Dow Jones correlate strongly. So, the Indian indices could continue to benefit from the new wave of liquidity.
The Nifty is up 32 per cent since January 2014. As mentioned above, pullbacks could hit a first level of support in the 8,150-8,200 zone while the uptrend could continue indefinitely. For reference, the 200-DMA of the Nifty is at around 7,150, which is almost 1,000 points below current index levels.
The outperforming sectors include banking and finance. Traders are betting that lower inflation and slow growth will goad the RBI into policy rate cuts. The Bank Nifty has gained by 12 per cent in October, while the Nifty gained 4.8 per cent. The CNX Finance has gained almost 10 per cent. These two sectors hold about 28 per cent weight in the Nifty and they have obviously contributed a huge amount to the current rally. Traditional defensives like FMCG, pharma and IT have underperformed.
The Nifty's Put-Call ratios (PCR) have improved and pulled above 1. The three-month PCR is at 1.04 while the November PCR is at 1.26. The November Nifty Call chain has massive open interest (OI) peaking at November 8,500c, though there is high OI till 8,700c. The November Put OI peaks at 8,000 but there's a bulge at 8,200p and ample OI till 7,700.
The spot Nifty closed at 8,325 on Monday with an intra-day high at 8,350. The trader can look at far-from money options for November, since we are very early into the settlement. However, even the near-the-money spreads are offering decent risk:return ratios.
A bullspread of long Nov 8,400c (80) and short 8,300c (42) costs 38 and pays a maximum of 62. A bearspread of long Nov 8,300p (76) and short 8,200p (47) costs 29 and has a maximum payoff of 71. The bearspread has a very favourable risk:reward ratio since it is closer to spot as well. This highlights the market's current optimism. A wider strangle of long 8,500c, long 8,200p, short 8,600c (19), short 8,100p (29) costs a maximum 41 and pays a maximum 59.
