Failure of Nifty to cross 8,180 will count as a bearish signal

The market has made a steady recovery heading into the settlement. Domestic sentiment seems stable, despite the controversy of the Black Money case. Domestic institutions and retail have been net buyers in October. However net institutional buying is close to zero due to consistent FII selling. Overseas sentiment also saw a recovery through last week with US markets registering good gains.

The net effect over the past five to six sessions has been small but steady gains with positive advance decline ratios and muted volumes. As of now, the Nifty is testing resistance at 8,100 and if it does breakout above 8,180, it would hit new record highs. A failure to breakout past 8,180 would count as a double-top which is generally seen as a bearish formation. The next five sessions should offer some clarity on these grounds.

The market is very likely to continue following the lead set by the FIIs. We are still in the post-Diwali period when domestic volumes are not so good. Settlement itself could be a tightly ranged session but there are chances of high volatility driven by thin trading immediately after the settlement.

Meanwhile, the dollar is hardening against the Euro and there has been a big bond market rally pulling US treasury yields down. The major indices at the NYSE and Nasdaq have bounced, after going into the red for the calendar year. Both the Dow Jones and Nasdaq indices dipped below their respective 200 Day Moving Averages and it's not clear whether the current US rally is sustainable.

The Nifty and the Dow Jones correlate quite strongly so the Indian indices could also dip if the US markets see another selloff. Other global markets are weak with Chinese and European GDP data looking bearish.

Since the Nifty is up 24 per cent since January, it is very unlikely to see net losses for the year. For reference, the 200-DMA of the Nifty is at around 7,150, which is almost 1,000 points below the current Index levels.

On the results front, the IT biggies TCS and HCL Tech have disappointed and so have Bajaj Auto, Reliance Industries and Hind Unilever. But there are quite a lot of positive bets on the banking sector. Traders are betting that lower inflation and slow growth will goad the RBI into policy rate cuts.

The Bank Nifty would have to be a major driver of any bullish fervour. It has pulled above the 16,500-mark and gone to new highs at 16,700, Since it has a lot of weight in the broader Sensex and Nifty, the banks could pull the overall market to new highs. If the Bank Nifty corrects down, the overall market could collapse.

The Nifty's Put-Call ratios have improved and pulled above 1, though this is not a reliable indicator close to settlement. The Nifty Call chain has massive open interest (OI) at November 8,200c, which is the likely upper limit but there is high OI till 8,500c. The Put OI peaks at 8,000 but there's a bulge at 7,700p and ample OI till 7,400.

The spot Nifty closed at 8,090 on Wednesday. The trader can look at far-from money options for November. A far-from money bullspread of long Nov 8,200c (76) and short 8,300c (41) costs 35 and pays a maximum of 65. A far-from money bearspread of long Nov 8,000p (60) and short 7,900p (38) costs 22 and has a maximum payoff of 78. The favourable risk:reward ratio of the bearspread highlights the market optimism. Combining these two contracts, the long-short strangles have a cost of 57 and a max payoff of 43.