The past few sessions have seen the Nifty marking time inside a range of 5850-6075. The breadth signals are negative while the time situation is ambiguous. The market could swing either way.
The last low of 5,690 came six sessions ago. The intermediate downtrend started on November 10 and there’s been over 10 per cent retracement from the 2010 peak of 6,338. The 5,650-5,700 level offers reliable support and it has not been violated. There has also been a pattern of higher highs (6,069 on Dec 6 versus 6,020) but the market has not been able to sustain closes above 6,000. Above and below current price (5,992), supports and resistances lie at 50-point intervals. If 5,650 is broken, confirming a continuing downtrend,. the Nifty could drop till 5,550, which is where the 200 Day Moving average is hovering. On the upside, a rise and ideally a close above 6,070 would be positive.
Volumes are fair but the advances-declines ratios are negative. Institutional attitude is worrying. Neither FIIs nor DFIs have been committing much and the attitude has been net negative on several sessions for both sets. If institutional attitude doesn't improve, the downtrend will continue. Intra-day volatility has eased. But be prepared for a breakout in either direction with a 150-point Nifty session.
The VIX has risen again. This suggests that traders are nervous about a sudden downwards breakout. The put call ratios for Nifty options are at normal levels. The December PCR is at 1.25 while the overall PCR is at 1.22. Of the subsidiary indices, the CNXIT has stabilised. But the Bank Nifty has come under pressure after short-covering briefly pulled it up. The CNXIT has resistance above 7,000 and is likely to trade 6,700-7,100. The BankNifty is clinging to support at around 12,000 after jumping once to the 12,450 mark. If 12,000 breaks, the BN could slide till 11,500.
Traders would have to be prepared in the next 5 sessions for moves till either 5,750 or 6,250. On the money, the 6,000c (99) and the 6,000p (99) are similarly priced. The close to money December bearspreads and bullspreads both offer reasonable risk-reward ratios. A bullspread of long 6,100c (54) and a short 6,200c (27) costs 27 and pays a maximum of 73. A bearspread of long 5,900p (65) and short 5,800p (41) costs 24 and pays a maximum 76. Not much to choose and both are good risk:reward ratios. My personal inclination would be to the bearspread. Combining the above bullspread and bearspread creates a long-short strangle combination that costs 51 and pays 49 if it goes to the maximum distance. This could be worth it if the trader can manage profit in both directions
The on-the-money (6,000c, 6,000p) straddle costs 198 with breakevens at 6,198; 5,802. It may be worth selling this and covering with a long strangle at 6,200c and 5,800p. The net premium inflow is 130, and the covered position has breakevens at 6,130; 5,870 and a maximum loss of70.