 "Slide below 7,539 on Nifty will confirm a big bear market")
The Nifty has meandered within a trading range for several weeks. The index has support at 7,700-7,725 but it has not been able to beat resistance at 7,900-plus. The short-term trend and intermediate trends are indeterminate.
The long-term trend must be bearish since the Nifty is trading below its own 200-Day Moving Averages (200-DMA) since late August 2015. The simple 200-DMA is at around 8,285, while the exponential 200-DMA is at 8,120 according to the NSE's calculations.
The global mood is nervous with the US Federal Reserve reaffirming intentions to raise the dollar policy rate on December 16. The European Central Bank has maintained an easy money policy but disappointed traders wanting even bigger easing. The Reserve Bank of India (RBI) has maintained status quo.
Foreign institutional investors (FIIs) have been consistent net sellers of equity through November and early December. Retail investors are net positive, albeit with reduced volumes. Domestic Institutions are also net positive. Volumes have been low but that is normal after the Diwali and in December when FIIs tend to be restrained.
If the index can move above 8,300, it would be a positive signal. But that is a long way off. There will not be absolute confirmation of a big bear market, until and unless the Nifty slides below 7,539, which is the 52-week low established in September 2015. But, net losses have been registered since early March and at best, we could hope the market is bottoming out.
The Bank Nifty may have higher volatility than the overall market. The option trader expecting high volatility may consider a strangle of long December 16,500p (146) and long 17,500c (148). The index is at 16,950. So, this is almost zero-delta. The total cost - 294- is a little over one per cent of spot and the breakevens are at roughly 16,200, 17,800. This spread would require a swing of roughly 4.7 per cent, or three big trending sessions in either direction. It would not be very likely under normal circumstances but the Fed could only about trigger such a move off.
The Nifty's put-call ratios are very bearish, hovering at around 0.82-0.85. The call chain for December has ample open interest (OI) at most of the strikes between 8,000c and 8,500c, with peaks at 8,000c, 8,200c. There is also a peak at 9,000c. The December put chain has big OI peaks at 7,500p and 8,000p (this is in the money) and good OI till 7,000.
The trader can afford to seek wider positions because there are still three weeks to go and the promise of volatility. The Nifty traded at 7,765 on Monday with the futures premium being at around 45. The near-the-money call premium is December 7,800c (120), and the on -the-money put is 7,800p (112).
A near-the-money bullspread of long 7,800c (120), short 7,900c (75) would cost 45 and pay a maximum of 55 - this is about 35 points away from money. A bullspread of long December 7,900c (75), short 8,000c (43) costs 32 with a maximum payoff of 68. This is at 135 points from spot. A bearspread of long December 7,800p (112), short 7,700p (73) costs 49 and pays a maximum 51, and it is in the money. A wider long 7,700p, short 7,600p (47) costs 26 and pays a maximum 74 at about 65 points from spot.
