The market appears to have moved into the next intermediate uptrend with strong buying through Diwali week. Most of the indices have registered new all-time highs. However, the Nifty has not yet made a decisive upside break. There is strong resistance between 6,200 and 6,400, though we’d expect the upside of that to be tested soon.
The market bounced from an intermediate low of 5,955, which is quite close to Fibonacci retracement calculations of 5,985. The rise till a recent high of Nifty 6,335 is just a trifle lower than the January 2008 record high of 6,357.
On declines, the Nifty should stay above support in the 6,100-6,150 zone while it should gradually push upwards towards 6,400. A rise till 6,600 cannot be ruled out if there’s good volumes backing the upmove. The institutional position remains a little mixed but the FIIs are still buying and the domestic institutions have moderated their selling.
Volumes remain reasonable in both cash and derivatives. Breadth signals have improved. More stocks are being traded and the advances have come across sectors. Both the Bank Nifty and the CNXIT have outperformed on the upside after seeing corrections. Both can be expected to lead further upmoves.
The Nifty’s put-call ratio remains in a normal-bullish range. The VIX is stabilising though it’s higher than it was a month ago. Premiums close to money are high but there’s a sharp decline away from money which suggests that trader expectations are of relatively small moves.
Close-to-money (CTM) call premiums are distinctly higher than puts. This asymmetry suggests over-confidence on the part of long traders. With the spot Nifty at 6,273, the CTM bullspread of a long 6,300c (90) and a long 6,400c (46) costs 44 and pays a maximum 56. The bearpsread of long 6,200p (57) and short 6,100p (35) costs 22 and pays a maximum 78..The differential is marked though the bearspread is further from money.
Further away, a long Nov 6,400c (46) and short 6,500c (20) bullspread costs 26 and offers a maximum return of 74. If you’re looking at long positions, take the FTM 6,400c -6,500c bullspread but a bearspread can be held CTM.
On November 1, with Nifty at 6,117, we’d recommended a Long call Butterfly with long 6,200c (premium on Nov 1= 99), two short 6,300c (Nov 1 premium 59x2) and a long 6,400c ( Nov 1 premium 33). This cost 14. It now costs 16 with L6200c (150), 2xS 6300c (2x90) and L6400c (46). It can be held with the intention to reverse closer to 6,300 or even till end of settlement hoping the market expires close to 6,300.
A long-short strangle combination with a reasonable width may also be worthwhile. A long 6,100p (35) and long 6,400p (46) together cost 81. A short strangle of , 6,000p (22) and S 6,500c (20) cuts net cost to 39. The combined long-short position would have breakevens at 6,061; 6,439 and a maximum one-way return of 61.
