The trend reversed late into settlement day and Monday saw a strong recovery on short-covering. It remains to be seen if this move can continue past strong resistance between Nifty 4,950 and 5,050. The projections of lower lows established by the recent sequence of 52-week lows remains valid.
The intra-day volatility has been quite high and implied option volatility suggests that the market is expecting further big swings. A move beyond 5,200 would be seen as very positive, however, at least in terms of the intermediate trend.
The long-term trend suggests however, that a slide till around 4,300 is possible within the December settlement. The long-term pattern is obviously bearish. For practical purposes, assume there will be supports and resistances every 50 points.
Renewed FII selling pushed the rupee to historic lows, followed by a sharp recovery, as FIIs bought on Monday. Many heavyweight and midcap stocks have, however, also hit 52-week lows along with the indices. The breadth suggests further losses are likely.
A breakout above 5,200 would develop a positive intermediate outlook again. Barring such an up-move, we'd expect the market to slide further or to range-trade 4,700-4,900. The daily high-low swings should continue to be 100-125 points or more. Big opening gaps will be normal.
The CNXIT tested key support at 5,700 before it recovered. A pullback till around 6,100 is possible. The weak rupee could help this sector outperform. The Bank Nifty has come back from below 8,200 to around 8,800. It could run into major resistance at 9,000-9,100.
Consider three possibilities. 1) A continued downslide below 4,640 could take the index down to 4,300 within the settlement (December 29) with a succession of new 52-week lows. 2) A climb above 5,000 could mean a rebound till 5,200. 3) Range-trading may continue between 4,700 and 4,900.
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The Nifty put-call ratio has recovered till a zone of 1.3-plus. This implies the up-move has a few sessions to run. Premiums close to money are pretty high. In the December call series, open interest (OI) peaks at 4,900c (121), 5,000c (75) and 5,100c (43) with ample OI at 5,200c (22) as well. In the put series, OI has twin peaks at 4,800p (112) and 4,500p (41) with good OI in-between at 4,600p (59) and 4,700p (82).
Consensus expectations are, therefore, between 4,450 and 5,200. That's a wide range. We should take fairly wide positions, since volatility will remain high. Even a partial recovery could move till 5,150 and a slide below 4,640 will probably drop till 4,450.
A bullspread of long December 5,000c (75) and short 5,100c (43) costs 32 and pays a maximum 68. The bearspread of long 4,700p (82) and short 4,600p (59) costs 23 and pays a maximum 77. These are attractive risk:return ratios, given a likely intra-day range of 125 points. Either spread could be hit inside just two sessions. The bearspread has the better ratio.
The index is at 4,860. Opposed set of calls and puts can be placed equidistant from money. This is zero delta and hence, low risk. A long-short strangle combining a long 4,600p and long 5,100c versus a short 4,500p and 5,200c costs net 38. The breakevens are at 4,563, 5,138. The maximum return would be 62.