Gujarat poll results could swing market either way

The market showed signs of an intermediate downtrend before it staged a partial recovery. The RBI did not cut rates and sentiment is wait/watch mode given the ongoing Gujarat Assembly elections. The central bank indicated that it is somewhat concerned about rising inflation and possible fiscal slippages.

The market slipped till Nifty 10033 on December 06, before it staged a 300-point recovery. That low broke prior support at 10095 (November 15 and Dec 04) and set up a pattern of lower lows. If the pattern of lower lows continues, the next support will come below 10000. FPIs have been sellers in December.
 

 Their selling has been more than matched by domestic institutional buying. Retail is nervous and focussed on smaller stocks. Midcaps continue to outpace large caps.

Gujarat election results could move the market either way. A comfortable BJP victory would lead to a rally; a Congress victory would trigger a sell off; a narrow BJP victory might trigger either a relief rally or a sell off.

Traders are braced for currency volatility. Brexit draws closer and the pound is under pressure. The Federal Reserve is expected to hike the US policy rate - the so-called Fed Funds rate in this week’s review. The Fed may also set timelines for selling off the massive bond holdings it acquired during the QE years. Policy reviews from the European Central Bank, the Bank of Japan, Russia and Indonesia could also lead to forex market swings.

The long-term trend is clearly bullish. The Nifty is trading well above its own 200 Day Moving average, which is now around 9750. The short-term trend is up. The intermediate trend is tentatively, down. The market would need to break above 10425 to create a pattern of rising peaks and signal a stronger intermediate trend. Trend following signals suggest buying with a stop at 10225. The Vix has stabilised at lower levels after spiking.

In the intermediate perspective, the bounce started from support at 9675-9700.  The 200 Day Moving Average is around 9750. In the longer-term, the Nifty moved North in late December 2016 from 7900 levels to a high of 10490 in early November.  The Index has bounced twice from 9675 since December 2016.
 

The Nifty Bank has slid more, and rebounded less, than the Nifty. The “Bank” is currently at 25400 after falling from 25953. A strangle of long Dec 28, 26000c (93) , long Dec 28, 25000p (173) costs 265.  This position is biased to the downside. But one side or another is very likely to be hit.

A trader could take this and sell short Dec 21, 26000c (62), short Dec 21, 25000p (125) to reduce net costs to around 78, if the short strangle expires without being hit. This net long-short position could give a big payoff if the financial index stays volatile. Three big trending sessions would take the long strangle into the money. If the short spread is hit, the long spread would also gain.  

The Nifty’s Put-Call Ratios is in neutral territory or mildly bullish. The Nifty closed at 10320 on Monday.  A bullspread of long Dec 10400c (89), short 10500c  (51) costs 38 and pays a maximum 62 and it’s about 80 points from money. A bearspread of long 10300p (101), short 10200p (70) costs 31, pays a maximum of 69 and is just 20 points from money.  The risk:reward ratio for the bearspread is obviously better.

A long 10000p (35), long 10600c (27) costs 62 and it has breakevens at 9938, 10662.  That requires a 3 per cent move in either direction. This is not unlikely and the strangle could be laid off by selling a short 9900p (25), short 10700c (15) for a net 22 and maximum return of 78.