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The market continues to have bullish undertones despite profit-booking in the Sensex-Nifty set. The ratio of advances to declines remained positive. This looks like a bout of profit-booking after indices hit all-time highs (in closing terms for the Nifty and absolute for the Sensex). The Nifty held above support at 6,250. The next target would be a cross of the all-time high of 6,357 and this remains on the cards.
The breakout above 6,230-6,250 implies that level will be a reasonable support and the action on Tuesday bears this out. The Nifty has also traded extensively between 6,100 and 6,225, so that congestion zone should provide multiple supports on any profit-booking. The 10 Day Moving Average and the seven-DMA are both in the zone of 6,200-6,225 as well.
On the downside, the 200-DMA should be the benchmark of this bull-market's health. The 200 DMA is now close to 5,875. The market would be reckoned bullish in the intermediate and long term but it may undergo a short-term correction or see range trading. The upmove has been backed by most sectors and market breadth has been good. Carryover on settlement was good.
The Bank Nifty saw a puzzling pattern. It managed to beat resistance above 11,400 but it has pulled back from below 11,750. This is way below its 52-week high of 13,400. The Bank Nifty focuses on the sector with the single-largest weight in the Nifty and it is normal high-beta with respect to the Nifty. The inability of the financial sector to match the broader market suggests the rally might not have much upside left.
In case the Bank Nifty catches up late, it may be worth taking a bullspread in the options market. A long November Bank Nifty 12,000c (183) offset by a short 12,500c (71) costs 112 and could gain a maximum 388 (it has gained since we recommended it earlier because the Bank Nifty had moved up). In the absence of thrust from banking, IT remains a positive zone and automobile stocks have been driving the rally as well.
November is likely to be fairly volatile. A movement of 500 Nifty points either way is not at all unlikely. There is often a sell-off after Diwali; the pullback on Tuesday could indicate such a trend. But steady foreign institutional investor support could alter that and push values specially after players like Goldman Sachs and Nomura have raised 2014 index targets. A trader should stayed braced for the Nifty to move anywhere between 5,700 and 6,700 in November and far-from-money spreads can be taken.
One would not recommend selling options far from money due to the possibility of a big swing. Premiums on the Nifty futures to spot are at 40 points, normal at this stage. A bullspread of long Nov 6,400c (62) and short 6,400p (32) costs 30 and pays a maximum 70. A bearspread of long 6,200p (73) and short 6,100p (47) costs 26 and pays a maximum 74. Wide strangles such as long 6,100p, 6,500c and short 6,000p (30) and short 6,600c (15) could also work. This offers a one-way return of 66 with breakevens at 6,066 and 6,535.
