Market likely to stay up till RBI policy

If there's a correction, it's unclear if there will be support/ resistance in the range between 8,200-8,550

The market continued to register new highs, with the Nifty pulling above 8,500. Global markets also ran bullish with China cutting rates and good US gross domestic product (GDP) numbers coming in. By definition, a market trading at new highs is bullish. But there are no benchmarks for judging resistances and targets.

If there's a correction, it's unclear if there will be support/resistance in the range between 8,200 and 8,550, since that zone has only been treaded very recently. Below 8,200, there are reliable support levels in the 8,150-8,200 zone. The current high is 8,535 and moves beyond that would confirm the trend stays strong.

On the global front, the dollar continues to harden against the euro and the yen. Equity indices have also zoomed in the US. Other global markets have much more mixed trends despite China responding positively to the rate cuts.

Foreign institutional investor  (FII) buying continues to be the driver for this rally in India. The FIIs have bought close to Rs 10,000 crore in the November settlement, which has been enough to push up prices despite selling by domestic institutions. The market is likely to stay up on the basis of optimism until the Reserve Bank of India (RBI) policy review of December 2, at the least. Even if the bank doesn't cut rates (the consensus suggests it won't), reform bills passing through the winter session of Parliament could keep the trend up. State legislative assembly election results could also be a news-based trigger.

Despite the consensus suggesting the RBI will stand its ground, some optimists are hoping for a rate cut. If this happens, it could push the market into a new orbit. The dollar-rupee equation remains well-correlated to FII flows but there is evidence the RBI is intervening regularly to keep the rupee in the desired band.

A serious correction could hit support in the 8,150-8,200 zone while the uptrend could also continue indefinitely. For reference, the 200-daily moving average of the Nifty is more than 1,300 points below current trading levels and that makes it look like an over-extended rally.  

  The outperforming sectors include banking and finance. Traditional defensives like fast-moving consumer goods, pharma and information technology have underperformed. The Bank Nifty would have to be a major driver of any bullish fervour. It crossed above 18,000 last week and it could head to the 20,000-mark if there's a rate cut. If the Bank Nifty corrects, the overall market would shift into correction. This could happen after the RBI review, if there are no cuts. The Nifty's put-call ratios (PCR) have improved. The three-month PCR is 1.3 while the November PCR is 1.7. The December Nifty call chain has massive open interest (OI) peaking at November 8,500c, though there is high OI till 8,700c. The December put OI peaks at 8,000 but there's a bulge in OI at 8,200p and ample OI till 7,700. The spot Nifty closed at 8,475  on Wednesday. The settlement may go through without much volatility but December is likely a big month. Traders could look at far-from money options for December.  

A bullspread of long December 8,600c (70) and short 8,700c (37) costs 33 and pays a maximum of 67. A bearspread of long December 8,500p (88) and short 8,400p (56) costs 32 and has a maximum payoff of 68. The bearspread has a favourable risk:reward ratio since it is in the money. A trader looking for a strangle should go wider. A combination of long 8,600c, long 8,400p, short 8,700c and short 8,300p (35) costs a maximum 55 and pays a maximum 45 with break-evens at 8,655 and  8,345.