The market bounced post-settlement. But it may not be enough to reverse the intermediate downtrend. As of now, resistance at Nifty 6,130-6,150 looks very strong and a pattern of declining tops and bottoms remains in force. Last Friday, the market dropped to 5,955, breaching support at 5,975.
In the immediate future, the market may be range-bound between 6,000 and 6,150, or it could decline sharply to 5,750-5,800 if it falls below 5,950. The third possibility — a rise to a new 2010 high would depend on the RBI’s new policy and trader response to that.
Volumes dropped in derivatives and cash volumes are difficult to judge because of hiatus in BSE trading. Breadth signals remain poor — declines outnumber advances over the last week. The FII buying momentum is not very strong. Domestic institutions do seem slightly optimistic, however.
The downtrend from mid-October could run for a further 1-4 weeks given the 18-week uptrend that preceded it. On the downside, there is support at roughly 50-point intervals. A worst case scenario would be a correction down to 5,550. Moves above 6,150 would suggest that the downtrend is easing or ending but the confirmation would be a rise till 6,300. .
The CNXIT and Bank Nifty are both looking in reasonable shape. The Bank Nifty would be a major driver if there is a rally since financial stocks would respond fastest to favourable RBI policy. The rupee weakening slightly versus US Dollar cannot do CNXIT any harm.
The Nifty’s put-call ratio remains in a normal-bullish range. The VIX has risen. Premiums close to money are high and call premiums Close-to-money (CTM) are higher than puts. This asymmetry suggests over-confidence on the part of long traders given weak institutional support.
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With the spot Nifty at 6,117, the CTM bullspread of a long 6,200c (99) and a long 6,300c (59) costs 40 and pays a maximum 60. The on-the-money bearpsread of long 6,100p (100) and short 6,000p (68) costs 32 and pays a maximum 68. The differential is marked.
Further from money, a long November 6,300c (59) and short 6,400c (33) bullspread costs 26 and offers a maximum return of 74. If you’re looking at long positions, take the FTM 6,300c-6,400c bullspread but a bearspread can be held on the money.
The other way to improve potential returns from a rising market is a long call butterfly with a long 6,200c (99), two short 6,300c (59x2) and a long 6,400c (33). This costs an initial 14 and that's the maximum loss with breakevens at 6,214; 6,386. If the market nears 6,300, you will be able to settle for a decent profit. The theoretical maximum is 86 if the market expires at 6,300.
Right now, strangles and straddles seem too expensive. A long 6,100c (152) and long 6,100p (100) together cost 252. A long strangle of say, 6,000p and 6,200c costs 167. Even if it's laid off with a short 5,800p (29) and a short 6,400c (33), the net cost is 105 with a maximum return of 95.