The Nifty gained for the fifth straight week. It's crossed over its own 200-Day Moving Average (DMA), which could be a signal of reversal for the major bear market. We'll have to see if this move sustains. As of now, the intermediate and short-term trends are definitely bullish and the long-term trend may also have reversed and turned bullish.
Institutional support has been good. The dollar-rupee rate has strengthened to below 49 on the back of strong FII buying. In terms of macro-news, there's good news out of the US in terms of better job data. But there could be further trouble in Europe and Iran.
In the short term, the market's next upside target would be somewhere between 5,400 and 5,600. On the downside, the key support level to watch is 5,200-5,250, because that's where the 200 DMA is trending. If the market dips below 5,200, we'll have to characterise this move as a bull-trap that sucks in long-traders disastrously.
The daily high-low volatility has been on the low side. The index has tended to open 25-50 points above the previous close and then not change much through the session. However, it would be safer to assume there will be a big 125-150 point session every so often.
Among subsidiary sectors, the CNXIT is holding above support at 6,250, with the next support at 6,100. The Bank Nifty has moved above 10,200 and the key support would be 9,900. The Bank Nifty is liable to outperform and lead overall market direction. However, the CNXIT could underperform in a continued rally due to a stronger rupee.
The Nifty put call ratio (PCR) is now in an overbought zone, with the February PCR at above 1.6 and the overall PCR at above 1.5. This could be a signal of an impending correction or a short-term phase of profit-booking.
Option chain examination shows that February call open interest (OI) is concentrated between 5,300c(139), 5,400c (83), 5,500c (43) and 5,600c (19). The February Put OI is focussed between 5,000p (19), 5,100p (31), 5,200p (49), 5,300p (77) and 5,400p (119). One would guess that consensus expectations are between 5,000 and 5,600 with an upside bias. Traders with a timeframe of five sessions, could focus between 5,200p and 5,600c.
A close to money bullspread of long February 5,400c (83) and short 5,500c (43) costs 40 and pays a maximum 60. One step further away, a long 5,500c and short 5,600c costs 24 and pays maximum 76. The close-to-money (CTM) bearspread of long 5,300p (77) and short 5,200p (49) costs 28 and pays a maximum 72.
Note that with the index at 5,360, the bearspreads and bullspreads positions are almost equidistant. The difference in risk-reward ratio is caused by a high PCR, which in turn, is caused by the expectation of a continuing bull-run. The CTM bearspread has a tempting risk:reward ratio but a bullspread trader may want to move to the long 5,500c-short 5,600c combination.
Looking at strangles, we can try a long 5,200p and long 5,500c covered with short 5,100p, short 5,600c. This long-short combination costs 42 and pays a maximum 58. The breakevens are at 5,158, 5,542. The chances of profit from both ends exists if there is a quick short-term reaction followed by a recovery.
