Breakout to new all-time highs

 

The markets shot up on Monday after rising through the whole of last week on the hopes of a clear verdict in the Assembly elections. Major gains by the Bharatiya Janata Party (BJP) have prompted domestic operators to ally with foreign institutional investors (FIIs) in speculative buying.

The breakout above resistance at Nifty 6,225-6,250 led to a breakout above the 6,350-zone, where the records were established way back in January 2008. In fact, the markets opened at Nifty 6,415 on Monday and remained above the 2008 levels even after profit booking pulled it back till 6,364.

Technically, this is a strong signal for a trend-follower. It is also relatively easy to trade. Set stop-losses at 6,250 or at 6,200 and go long. The first target would be a move past 6,415 and if that happens, the index could keep going. The trend follower would hold the trade and just move the stop-loss up.

Obviously, the long-term trend is bullish and could accelerate. The intermediate trend is also bullish. The short-term trend might be negative, since there will be a tendency to fill Monday’s gap in the 6,250-6,350 zone in the next couple of sessions. However, the market should stay above the level from which the breakout started, roughly 6,200-6,250.

The Bank Nifty was a major mover, though most stocks participated in the rally. The financial index did see a major selloff towards the end of the session. And, unusually enough for this stage of settlement, the futures went into nominal backwardation compared to spot. Based on chart patterns, profit booking could push the Bank Nifty down till the 11,800-11,850 level. However, we’d expect the financials, both high-weight and high-beta with respect to the Nifty, to continue being bullish in the intermediate term. A long 12,500c (145) offset by short 13,000c (38) costs about 107. The value will drop if the index corrects some more and could be worth buying.

The Nifty’s put/call ratios (PCR) remain surprisingly low but in neutral to bullish territory. The December PCR is at 1.08, while the three-month PCR is at 1.03. My interpretation would be that the rally could go quite a bit further. Also, the PCRs might reflect fears of a profit-booking phase that transforms into a selloff.

If the implied volatility signals are indicative, traders continue to expect big moves late in December. Premia are high and calls are relatively higher than puts. It would be sensible to stay braced for end-month values in the 6,000-6,600 range, with a current bias towards an uptrend.

The spot Nifty is at 6,364, with a futures premium of 15-20 points. A long 6,400c (92) and a long 6,300c (63) costs roughly 150 taken together. The breakeven points of 6,550 and 6,150 could be assumed to be minimum swing expectations in the 10 sessions.

An on-the-money bearspread of long 6,300p (63) and short 6,200p (38) costs 25 and pays a maximum 75. This is quite attractive in terms of risk:reward. An on-the-money bullspread of long 6,400c (92) and short 6,500c (49) costs 43 and pays a maximum 57. This is also quite acceptable.

A strangle combination of long 6,500c, long 6,200p, and short 6,600c (22), short 6,100p (23) costs 43 and yields a maximum one-way return of 57. This is roughly zero-delta, with the calls placed slightly closer to money. It’s very likely that one of the breakevens of 6,157 and 6,543 could be hit. The risk:reward ratio is reasonable.