The market has broken downwards. The Nifty hit a new 52-week low. It's been a parade of bad domestic news, and global news. The last straw for traders was a do-nothing the RBI policy. The smart money seems bearish with very modest domestic institutional buying and continued FII selling. Influential market analysts continue to recommend clients stay underweight in Indian equity.
Intra-day volatility remains high, and so does implied volatility, eight sessions before the last settlement of 2011. The drop to 4,560, establishing a new 52-week low, confirms that the long-term trend is still bearish. On the upside, there's resistance at every 50 points and a recovery would have to lift the Nifty beyond 5,050 to be seen as genuinely positive.
The rupee has also plunged lower. Now that the market has busted 4,600, a rapid slide to the 4,300-level seems probable. A partial recovery would lead to range trading between 4,650 and 5,050. The daily high-low swings may continue to be 100-125 points. Big opening gaps will continue to be normal.
In the broader market, matters are even worse with very poor advance-decline ratios and small stocks suffering from lack of liquidity. Among important subsidiary sectors, the CNXIT may just outperform, given that RBI has been unable, or unwilling, to shore up the rupee. However, the CNXIT too, has slid below 6,000, which is a key signal of weakness.
The Bank Nifty has hit a new 52-week low and all indications are that it will slide more than the overall market. Almost every major bank and NBFC/specialised financial institution has hit new lows in the past 10 sessions.
The Nifty put call ratio is well below the danger mark at around 0.9. Premiums are higher than one would expect, given expiry effects. In the December call series, open interest peaks at 5,100c (4) with ample OI at 4,700c (59), 4,800c (30), 4,900c (14) and 5,000c (7). In the put series, OI peaks at 4,500p (46) and there's good OI below at 4,600p (81), and at 4,400p (24) and 4,300p (12). Consensus expectations are roughly between 4,300 and 5,100. That's a very wide range given just eight sessions and it reflects an extremely nervous, thin market. Ideally, given good spreads close to money, we should focus on a narrow range.
A close to money bullspread of long December 4,700c (59) and short 4,800c (30) costs 29 and pays a maximum 71. The in-the-money bearspread of long 4,600p (81) and short 4,500p (46) costs 35 and pays a maximum 65. A wider bearspread of long 4,500p (46) and short 4,400p (24) costs 22 and pays 78. I'd be tempted to go for the slightly wider bearspread.
Either bearspread or the recommended L4,700C-S4,800c bullspread could gain 50 per cent if the market sees the right 100 point-swing. In fact, if we combine the long 4,500p and the long 4,700c with a short 4,400p and short 4,800c, we can create a long-short strangle that looks tempting. It offers maximum one-way payoffs of 49 each at a cost of 51 with breakevens at 4,449, and 4,751. Both ends could be struck within the next two or three sessions, offering a bonanza to a nimble trader.
