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The market has moved up, slowly but consistently with gains through the past five sessions. The looming fear of a US government shutdown and its possible consequences is one retarding factor. Inflation and IIP data remain weak. However, trade data does suggest the CAD will come under control. In domestic politics, Telangana could play a role. Initial Q2 results have been encouraging.
The Nifty has moved above 6,000 and sustained above that for four sessions in a row. It has not broken above the previous intermediate peak of 6,142. One would classify the trend as bullish with some reservations. A breakout past 6,142, ideally a breakout past the 2013 high of 6,230, would give more confidence. On the downside, the support level at 5,825-5,850 is critical. This is where the 200-DMA is placed.
Despite the narrow daily ranges and the apparent uptrend, futures and options contracts continue to see large premiums indicating high implied volatility. Mean -reversion trading models suggest the Nifty will turn around by the end of this truncated week and, if the US shutdown escalates, there may be a sudden massive downswing. Trend-following signals and models suggest staying long of course, till such time as the market definitely hits resistance it cannot break.
Q2 results have started coming in. Infy has delivered on the high side of consensus and sparked a bull run across the sector. If TCS beats or matches consensus on Tuesday, this pattern will be well established. RIL is not expected to do well. There's are some speculative plays visible in pharma and auto. The macro-economic data are all somewhat disappointing. That has, to an extent, been balanced by good trade data. The rupee seems less likely to be under threat. If there is a US shutdown, strange things will happen in the forex markets. If there is a compromise, the dollar will probably gain temporarily. Either way, be prepared for some excess volatility on dollar-rupee.
Nifty put-call ratios for October-December remain in a healthy range at 1.2 to 1.3. This suggests most are optimistic. Option premiums are high. Under normal circumstances, slightly far-from-money spreads could still be taken. There is time till expiry and chances of high volatility. One would not recommend selling options far from money because of the possibility of a big swing caused by a shutdown.
Traders should remain prepared for moves between 5,700 and 6,350 in this settlement. A bullspread of long October 6,200c (81) and short 6,300p (4) costs 37 and pays 63. A bearspread of long 6,000p (61) and short 5,900p (41) costs 20 and pays 80. A strangle of long 6,000p (61), long 6,300c (44), short 5,900p (44) and short 6,400c (20) costs 44 and breaks even at 5,956, 6,344.
