Breakout from 8,150-8,450 range on Nifty key to determine trend

The stock market continued to range-trade as the results season kicked off with Infosys reporting good numbers. Macro economic data released on Monday evening included the Index of Industrial Production (IIP) for November and the Consumer Price Index (CPI) for December. Both beat consensus expectations. So there could be some upside pressure. However, FII attitude remains bearish in 2015, with net equity sales. Domestic institutional attitude is positive. Volumes are still on the thin side.

The Nifty has meandered within a trading range for several weeks. It has stayed above key support in the 8,150-8,200 zone. It has hit resistance at 8,400-8,450 and not been able to breach that decisively. It would be hard to call a serious trend until the index pulls outside that zone of 8,150-8,450.

On a wider timeframe, there has been a lot of trading between 7,900 and 8,600 in the past four months. The next bounce must beat 8,627 to register higher tops and confirm the big bull market remains alive. On the downside, a fall below 7,960 would be significant in that it would set up a bearish pattern of lower lows.

Short-term traders can assume congestion at every 50-point interval. The BankNifty and other financial stocks have moved up sharply to a succession of new highs on the hopes of rate cuts and also assurances of less political interference for PSU banks from the PM. This could drive the overall market up, given the high weight (and high-beta nature) of the financial sector.

The rupee has seen quite a strong recovery versus the dollar in the past 10 sessions. The CPI inflation trend actually rose slightly in December, compared to November. But that was expected and consensus expectation was of a higher point-to-point CPI. The November IIP moved into positive territory after the October IIP had registered seriously negative. So, the domestic indicators are reasonably positive.

However, FIIs are waiting for global cues such as a potential bond-buying scheme by the European Central Bank. There is a fair chance that such a liquidity enhancement policy will come through from the ECB. In that case, FIIs would be prepared to commit larger amounts to Indian equity.

Based purely on Infosys's results, there is positive expectations of the IT sector but this will have to be backed by results from other IT majors. The BankNifty is likely to be decisive in moving the broader market. Expectations of rate cuts from the Reserve Bank of India and assurances of non-interference from the government could take the financial index to new all-time highs. There is also speculative investment flowing into FMCG majors.

The Nifty Call chain has open interest (OI) peaking in the range between 8,400c and 8,500c, with another smaller OI bulge at 8,700c and some OI at 9,000c. The Put OI peaks between 7,800p and 8,400p. The put-call ratio (PCR) is healthy at about 1.3 for January and 1.35 for the three-month range.

The spot Nifty closed on Monday at 8,323, with the futures at 8,362. The close-to-money January bearspread looks good with a long 8,300p (76) and a short 8,200p (49) costing 27 and offering a maximum return of 73.

Despite being further from money, the close-to-money bullspread is not so attractive, with long 8,400c (80) and short 8,500c (43) costing 37 and paying a maximum of 63. A wider long 8,500c (43) and short 8,600c (20) costs 23 and pays a maximum 77. This could be worth taking. A strangle combination of long 8,500c, long 8,300p, short 8,600c, short 8,200p, costs 50, and breaks even at 8,250, 8,550. The asymmetric delta and higher call premiums indicate high optimism.