The market continued to range trade after a false breakdown followed by a recovery triggered by the credit policy. The US elections could provide an impetus for a move outside the trading range.
The short-term support for the Nifty is between 5,625-5,675, with short-term resistance at 5,700-5,750 and further resistance all the way till the 52-week high of 5,815. Last week, it dropped below 5,600, finding support at 5,580-5,590 before it pulled back above the 5,700 level.
The trading range remains roughly between 5,600-5,800. A drop below 5,580 or a rise beyond 5,815 could mean a breakout or breakdown and lead to a 200 point swing till below 5,400 or above 6,000. One technical interpretation is lower tops and bottoms suggesting a breakdown is more likely. Another interpretation is a triangle or falling wedge pattern, which could lead to a continuation of range trading, or an upside breakout.
The long-term trend is bullish. Volumes remain reasonable but on the lower side. The attitude of foreign institutional investors (FIIs) continues to be net positive and domestic institutional investors remain net sellers. The USD looks bullish and it has a history of strengthening immediately after a US presidential election. Political newsflow from overseas is very likely to trump local corporate results. The potential for USD strengthening could be offset if there's high FII net buying, which has a tendency to push up the rupee.
The credit policy incorporated one negative surprise in the CDR provisioning hike. The Bank Nifty could dip again and the key support is between 11,125 and 11,175. On the upside, there's resistance above 11,500. The Bank Nifty is high-beta with respect to the Nifty and the major market index will move in the same direction as the financial index.
Traders seem braced for a big move in November despite the persistent range-trading. The Nifty put-call ratios stand at a mildly bullish range of 1.15 (for November 2012) to 1.25 (November 2012-January 2013). Option chain analysis suggests traders are optimistic about an upside breakout. But there's also a lot of downside hedging evident.
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The November call chain has high open interest (OI) between 5,700c (95), 5,800c (46), 5,900c (19) and 6,000c (7) with a peak in OI at 5,900c. The put chain has high OI from 5,200p (3), 5,300p (4), 5,400p (7) , 5,500p (14), 5,600p (28) and 5,700p (57)with OI peaks at 5,600p and 5,300p.
Since the underlying index is at 5,705, with the futures at 5,740, the premiums are skewed in favour of calls. There has been little change in near-month premiums in the past five sessions, purely due to time-decay. The on-the-money, zero-delta straddle of long 5,700p and long 5,700c costs roughly 150, which implies swing expectation in the next three-five sessions is 5,550-5,850.
Near-the-money return to risk ratios are better for bearspreads. The on-the-money bullspread of long November 5,700c (95) and short 5,800c (46) costs 49 and pays a maximum 51. The on-the-money bearspread of long November 5,700p (57) and short 5,600p (28) costs 29 and pays a maximum 71.
A bullspread of long 5,800c (46) and short 5,900c (19) costs 27. A bearspread of long 5,600p (28) and short 5,500p (14) costs 14. A strangle of long 5,800c, long 5,600p, combined with a short strangle of long 5,500p and short 5,900c costs 42 and pays 58.