Short and intermediate trend bearish

Global fears heightens due to the US elections next week

The market mood is cautious. Global fears have heightened due to the US elections next week. The shockwaves from the Tata Group and lacklustre early results have also weighed down sentiment. Yields are high in global bond markets and there’s strong consensus that the US Federal Reserve will raise rates in December.

The Nifty seems to be stuck within a narrow range trading band. The index has support at 8,500 and it has resistance between 8,700 and 8,750. The range trading will very likely continue till news flow out of US elections provides some direction. A move till either 8,100, or till 9,000 could arise, on a breakout or a breakdown, depending on US election results. Tentatively, the market is more likely to favour a Clinton win and that could cause a relief rally.

As of now, the index has a pattern of lower highs and lower lows. The VIX has risen to its highest level in the last 20 sessions and that could indicate a sharp fall. Tentatively, the intermediate and short-term trends seem bearish, while the long-term trend is up.

On the upside, the index would have to move above 8,750 for the first positive signal and it would need to pull above 8,970 to confirm the bullish trend that has been in force since March 2016. On the downside, a break below 8,500 would be a first signal of bearishness.

The rupee could become a target under certain circumstances. The dollar may harden. RBI is still reversing $26 billion of dollar-rupee FCNR swaps. Government rupee bond yields have stayed low. The FIIs have been net sellers in both rupee equity and in rupee debt through October. Domestic investors are net buyers. Retail also remains positive but retail volume is likely to ease off  post-Diwali for at least a fortnight.

The Nifty Bank remains high-beta. It hit a new all-time high at 20,575 on September 7 and it has subsequently hit a recent low of 18,825, on October 13, 2016.  That is a retraction of 8.5 per cent from the peak - much more than the concurrent five per cent correction of the Nifty. It could imply that the Nifty has a downside.

As of now, the Nifty Bank is at around 19,450. A long Nifty Bank call of 20,000c (173) for November 24, and a long November 24, 19,000p (206) costs 379. Either end of this long strangle could be struck, given two big trending sessions in the November settlement. Traders could also sell the November 11, 19,000p (70) and the November 11, 20,000c (68). This would cut the cost of the long strangle by 138, reducing it to 211. If the short strangle is struck, the long strangle would automatically rise in value and compensate.

The Nifty call chain has a huge spike in open interest (OI) at 9,000c ,with big OI at 9,200c and 9,500c and good OI till 10,000c. The put chain has maximum OI at 8,500p, with another big bulge in OI at 8,000p. The put-call ratios are not so useful this close to settlement but they are showing bearish values of below 1. Coupled to the high VIX, that is a second bearish signal. The Nifty is at 8,626. A bullspread with long November 8,700c (91), short 8,800c (55) costs 36 and pays a maximum 64. This position is about 75 points from money. A bearspread with long November 8,600p (87), short 8,500p (60) costs 27 and pays a maximum 73. This is only 26 points from money. So, it looks more attractive.