The market hit a new intermediate low of 5,690 on Friday and stayed above those levels on Monday. The breadth signals as well as the time factors seem to suggest the downtrend may continue for 5-10 sessions. The intermediate downtrend started around November 10 and there’s been over 10 per cent retracement from the 2010 peak of 6,338. Retracement calculations suggest that if support in the 5,650-5,700 range is broken, the Nifty could drop till 5,500-5,550, which is where the 200 day moving average is hovering. On the upside, there’s resistance at 50-point intervals above the current levels of 5,800-5,850. A climb above 6020 would break the pattern of declining tops.
Settlement was volatile and Friday was high-volume. Cash volumes remained fair on November 29. Intra-day volatility may ease but be prepared for 150-point Nifty ranges. Carryover was fairly good. Institutional attitude is worrying because there was significant selling from FIIs (over Rs 4000 crore in net sales) in the last 10 sessions.
The put call ratios for Nifty options have stabilised at normal levels post-settlement. The December PCR is at 12.5 while the overall PCR is at 1.23. The VIX is down. These are positive signals. Of the subsidiary indices, the CNXIT appears to have stabilised and the Bank Nifty saw short-covering. The CNXIT is buoyed by the falling rupee and may have more upside than downside. However, the financial index looks weaker and another slide till the 11,500 BankNifty level is quite likely, while there is very strong resistance at 12,000.
In the Nifty itself, we’d expect 5,650-5,700 to be tested again. The market could also bounce up till around the 6,000 level as well, purely on short-covering and profit-booking. A derivatives trader should be prepared for swings between 5,650 and 6,050 in the next five sessions. If the market moves outside that range, moves till 5,450 or 6,250 would be possible.
December bearspreads and bullspreads close to money offer reasonable risk-reward ratios. A bullspread of long 5,900c (105) and a short 6,000c (64) costs 41. A bearspread of long 5,800p (116) and short 5,700p (81) costs 35 and pays a maximum 65. The bearspread is closer to money. Combining the above bullspread and bearspread creates a long-short strangle combination that is expensive.
Of available strangles, even a long 6,000c and a long 5,700p laid off with a short 6,100c (35) and a short 5,600p (54) costs 56 and pays maximum 44 on a one-sided move. This is also an adverse risk:return ratio.
Wider strangles are unlikely to be struck unless there’s a breakout. If you can handle the risk, it seems worth selling a short 6,100c and short 5,600p strangle. This can be left naked, given the 500-point range for a net inflow of 89. Alternatively, it can be laid off with a long 5,500p (35) and a long 6,200c (17) for a net premium inflow of 37 and a possible maximum loss of 63.
