Fall below 7,539 on Nifty would indicate long-term bear market

The Nifty has meandered within a trading range going into the derivatives settlement. The index found support at 7,700-7,725, but it has not been able to climb past resistance around the 7,875-7,900 mark. The short-term trend and intermediate trends remain indeterminate. But, the long-term must be accounted bearish. The Nifty failed to beat the simple 200-Day Moving Average in the last rally, which fizzled out with a peak around 8,336 on October 23. The index has also established a pattern of falling peaks since August, when it was trading around 8,600.

As of now, the global mood is nervous with the US Federal Reserve reaffirming that it could raise the so-called Fed Funds policy rate at its next meet on December 16. Geo-political tensions are up after the terrorist strike on Paris. Foreign institutional investors (FIIs) have been consistent net sellers through November. Retail investors tend to disappear in the period immediately after Diwali. So, it is only domestic institutions supporting the market now. If the index can move above 8,350, it would be a very positive signal - but that is a long way off. There is no absolute confirmation of a big bear market. For that, the indices need to move below prior 52-week lows. The Nifty hit a low of 7,539 in September and a bottom lower than 7,539 would establish a long-term bear market for sure.

Given net losses since the Nifty peaked in early March at 9,119 points, most technicians would assume a big bear market is on. There have been eight months of losses and breadth has eased off post-Diwali. Even if this is temporary, there is every chance that breadth will stay low through December when the FIIs also take a break. Volumes have also been low but that is normal after Diwali.

The Bank Nifty is as always, likely to show higher volatility. Inflation numbers and the Fed statement, as well as the Reserve Bank of India stance could affect banking more than the broad market. The option trader playing for high volatility many consider a strangle of long December 16,000p (103) and long 18,000c (107). The index is at 16,988. So, this is zero-delta. It would take a big move of roughly six per cent to strike either end. If you don't think that's likely, you can sell this strangle.

The rupee is also under pressure and it is likely to stay that way until the Fed meet. A sharp fall is likely if the Fed does hike. These could also be a big bounce in the rupee if the Fed does not hike. The Nifty's put-call ratios are not so useful close to settlement. But, they look very bearish, hovering at around 0.81-0.85. The call chain for December has ample open interest (OI) at most of the strikes between 8,000c and 9,000c. The December put chain has big OI peaks at 7,500p and 8,000p (this is in the money) and reasonable OI till 7,000.

The Nifty traded at 7,830 on Tuesday. The on-the-money premiums are December 7,800c (178), and 7,800p (117). A near-the money bullspread of long December 7,900c (125), short 8,000c (84) costs 41 with a maximum payoff of 59. It is at 70 points from spot. A wider long 8,000c, short 8,100c (52) costs 31 and pays a maximum 69. A bearspread of long December 7,700p (84), short 7,600p (59) costs 25 and pays a maximum 75, and it is 130 points or so from spot. The trader can sell wider positions with a two-three session perspective, intending to square off after the settlement as premiums drop.