The Nifty seems to have moved into an intermediate uptrend with the New Year. The break above 6,070 on December 30 created a pattern of higher highs. Along with an established pattern of higher lows, this confirmed an uptrend. In hindsight, December saw an indeterminate range-trading pattern but we can say that the last intermediate downtrend ended on November 26 with a low of 5,690. The breakout above 6,070 implies a possible move of around 250 points.
That is, the Nifty may test the 2010 highs at around 6,330-6,340 before this move ends. An uptrend inside what could still be a major bull market should in fact, establish a new high. If it does cross the all-time high of 6,357 (January 2008), a climb till 6,500 is possible. This, however, looks unlikely since breadth isn’t exceptionally good. In the near future, the Nifty must overcome resistance between 6,150 and 6,250 and may mark time in that zone. On the downside, 6,050-6,070 should be support and below that 6,000. In terms of time, an uptrend could last for another four-eight weeks so we could expect an uptrend through January settlement.
There’s been volume expansion in the New Year. Foreign Institutional Investors have returned as net buyers and increased their commitments moderately after staying away through late-December. Domestic institutions are still net negative in attitude. Open interest is reasonable and the index put-call ratios are very positive. The VIX is at a very low level and may understate the likely future volatility. Hence, traders should look to buy options, not sellthem.
Of the subsidiary indices, the CNXIT has hit new all time highs and is capable of rising further. The CNXIT should stay above support at 7,350. The BankNifty made some sort of recovery but it is under pressure. The Bank Nifty’s key support is at 11,500, and there’s resistance at 11,900. In the Nifty, traders should brace for moves between 5,800 and 6,500 in January settlement and moves between 6,000 and 6,300 in the next three-five sessions. Close to money January bearspsreads have better risk:reward ratios than January bullspreads. A long January 6,200c (73) and 6,200p (36) costs around 37 and pays a maximum of 63. A January bearspread of long 6,100p (69) and short 6,000p (41) costs 28 and pays a maximum 72. The underlying is almost midway at 6,146.
A combination long-short January strangle can be taken with a long 6,300c (36), long 6,000p (41), and short 6,500c (14) and short 5,800p (6) for a net cost of 57. Breakevens are at 5,943; 6357. This is a position to be held with a perspective of 10 sessions, at least and it could offer a maximum return of 143 on a one-way move to either 6,500 or 5,800. As of now, the chances of further upmoves look reasonable. If there is a breakout past 6,360, it could turn into a run till 6,500. More likely, the market will range trade the 6,000-6,300 zone but the odds for an option trader favour taking positions braced for a breakout.