Strong support around 10,125 levels on Nifty

The market corrected through the past week. In fact, it has seen net losses through the November settlement. After hitting a high of 10,490 on November 6, the market has reacted to a recent low of 10,216 on November 13.

There were multiple negative data points but one way of looking at this would be to assume that traders wanted an excuse to book profits. A weak Index of Industrial Production for September, and rising retail inflation for October might have been triggers. Higher global crude oil prices may also have started to bite. Global trends have also weakened somewhat. But, corporate results have been better than low expectations. There is a low base effect versus July-September 2016 and this could be a bullish factor. 

Interestingly, FPIs (foreign portfolio investors) bought through last week and so did domestic institutions. But, heavy retail selling was enough to pull the market down slightly. On Monday, the institutions also sold and the downtrend got sharper.

Given the recent new highs, the long trend would be defined as bullish. But, the short-term trend is down. It is too early to judge the intermediate trend, we need to see a pattern of lower highs, or lower lows. Trend following systems now signal going short, with a trailing stop loss at 10,400. The Advance Decline ratio is negative. The VIX is in calm territory but it has spiked which could indicate continued profit-booking. There's a lot of support between 10,125 and 10,175. A drop below 10,125 would confirm the intermediate downtrend. 

In a longer perspective, the bounce started from support at 9,675-9,700. The 200 Day Moving Average is around 9,550, well below the current levels. Taking a longer-term view, the Nifty moved North in late December 2016 from 7,900 levels to a high of 10,490 in early November. It has bounced twice from 9,675 during this 11-month period. 

The Nifty Bank has been an outperformer. After hitting a recent all-time high of 25,695, it has lost less ground than the broader Nifty. However, it is also trending down. The other weak sector could be energy, given the uptrend in crude prices. The rupee is also trending down. 

 

The Nifty Bank is at 25,350. A strangle of long November 30, 26,000c (105), long November 30, 24,500p (75) now costs 180. This is not zero-delta. But, a trader could take this and sell short November 23, 26,000c (55), short November 16, 24,500p (32) to reduce the net costs to around 93. This net strangle position with the long-short calendar spread could have a big payoff if the financial index remains volatile. Three big trending sessions would take this into the money. 

The Nifty's Put-Call Ratio is now bearish at around 0.9. The November Nifty call chain has peak open interest (OI) at 10,500c, and high OI until 11,500c. The November put chain has very high OI between 9,500p and 10,300p with peaks at 10,000 and 10,200.

The Nifty closed at 10,225 on Monday. A bullspread of long November 10,300c (93), short 10,400c (53) costs 40 and pays a maximum 60. This is about 75 points from money. A bearspread of long 10,200p (79), short 10,100p (51) costs 28, pays a maximum of 72 and only 25 points from money. 
 

Obviously the bearspread is more attractive in terms of risk-return. Traders could take positions with a downside bias. One way is to sell call options far from money. A short 10,500c (30) for instance, should be fairly safe, perhaps offset by a long 10,600p (13).

A trader could also buy 10,100p (51), sell two 10,000p (2x34), buy 9,900p (22). This costs a net 5, and a maximum return of 95 at 10,000, with profits if the index is between 9,905 and 10,095.