What are the indices doing

crop ethnic trader using smartphone against laptop at home

The very first watchlist on my trading terminal is made up of major NSE indices. We directly trade only 3 of them directly, NF, BNF and FNF. Out of these, I have never traded FNF, and by looking at the option chain, the liquidity seems pretty low. NF has about 15 lac open contracts. By comparison, FNF has only 3000 for the current weekly expiry.

So let us look at Nifty:

After a mind blowing rally for a year, Nifty seems to be taking a breather. My charts say that the lowest nifty can go is about 13500. That is a roughly 10% correction from current levels. The trendline originating from the March lows of previous year was very steep so it was expected that NF will break below it at some point in time. But shorting the market in anticipation of a trendline breakdown would have proved to be much too costly throughout 2020.

It will be interesting to see which sectors will be leading this correction. RJ in his recent statement said that valuations of the metal stocks are too high for his comfort. I personally think banks can see a good correction. Market will likely be supported by IT stocks. One rationale of this can be found in USDINR chart.

If sectoral rotations take place, a lot of good stocks could be available at a reasonable valuation. The word reasonable might have to be redefined here. With more cash running behind same number of assets, prices of them are likely to rise. In stock market that converts in quality or in demand companies commanding higher and higher multiples.

In terms of trading ideas, I will consider writing hedged 15500 CEs if ATH is tested. I have a long portfolio which roughly equates in value to 50% of notional value of one lot of NF so it wont be all that risky. Though some of the companies have relatively small correlation to NF. Should the markets fall, I will go long in NIFTYBEES or enter into Bull Put Spreads at 13600 levels. I am extremely tempted to do iron condor for 14500-15500 range, but with VIX likely to spike, the NF might break that range, or if nothing else give fakeouts. And since NF is not near the middle of the range the iron condor will have a directional bias.

In BNF I will either wait for ATH of 2020 or the upward sloping trendline to be tested before going long. My go to strategy will be next month FUT long with call writing. If 30000 is tested again, my strategy will be to buy far month ITM call and sell current week OTM call. This will be cheaper than naked long and won’t require EOD cash settlement which comes with a FUT contract.

Markets are showing some signs of exhaustion. If we get a period of sideways movement, I will have a field day with options writing, but the volatility trend doesn’t seem to suggest that.

It will be wait and watch for me till the market picks a direction. What are your thoughts?