The Nifty has inched up over the past week, recording successive 52-week highs. The index could test resistance above 6,100 and may achieve targets somewhere in the range of 6,150-6,200. The near-term support is at 6,040-6,050 with further support at roughly 50-point ranges lower down. The current reading is bullish across short, intermediate and long-term. But there is a lot of resistance above 6,050 and sessions have seen very narrow ranges.
On the downside, a breakdown below the 5,940-5,950 support would lead to a reversion to range trading between 5,820 and 5,965. On the upside, given resistance we've seen, it's likely that the 6,200 mark will be insurmountable in this settlement.
Newsflow is critical with Q3 results coming in. The IT industry has in general, delivered. The CNXIT index has done well with Infy, HCL Tech, TCS, MindTree, etc, all pushing up values. The market has already discounted expectations of at least a token rate cut in the January 29 credit policy. The Bank Nifty has been subdued, consolidating between 12,650 and 12,900. If the Reserve Bank of India doesn't cut, it could fall sharply. A cut could push it past the 13,000 level. Volumes remain good. The FII attitude is net positive. DIIs remain net sellers. Volatility in the dollar is likely to continue. The rupee has strengthened. It could be time for a correction in favour of the dollar unless FII buying keeps the greenback down.
This week sees quite a few "real economy" heavyweights like L&T, NTPC, Maruti, RPower, RCom, declaring results. Gains in these sectors could push the indices up further and of course, the diesel hike has led to a strong trend in PSU oil. Reliance has also delivered a positive surprise.
There's every reason to be bullish. But be prepared for a volatile end of settlement. The credit policy comes in on Tuesday, which implies potentially sharp gains or losses in the last three sessions. The put-call ratio is bullish, with the January PCR at around 1.5, while it's around 1.3 for the three months, January-March 2013.
The January call chain has high open interest (OI) between the in-the-money 6,000c (109), 6,100c (43), 6,200c (12) and 6,300c (2) with a big OI bulge at 6,200c. The put chain has high OI from 5,800p (3), 5,900p (7), 6,000p (18) and the in-the-money 6,100p (50). Given the Nifty at 6,073, with the futures at 15-20 points premium, excellent risk:reward ratios are available for spreads close to money. Of course, the expiry is also affecting far-from-money premia.
Consensus trading expectations seem within the 5,900-6,200 range. This implies a potential rise of 125 points balanced against a possible drop of 175 points. The straddle at 6,100 (long call+long put) costs 93, with breakevens at 5,980, 6,165. That is the maximum swing expectation in the next three-four sessions. The straddle can be laid off with a short 6,200c and a short 6,000p to cut the net cost to 64. This long-short position would offer a maximum return of 36. But it has breakevens at 6,036, 6,164, and a very high chance of positive payoff.
The bearspread of long 6,100p (50) and short 6,000p (18) costs about 32 and pays a maximum 68. This is in the money. An on-the-money bullspread of long 6,100c (43) and short 6,200c (12) costs 31 and a maximum payoff of 69.
