Fall below 7,960 will indicate bearish pattern

The index has meandered between 8,150-8,450. It would be hard to discern a directional trend until there is a move that pulls outside that zone

Volumes are still thin after the New Year. Foreign institutional investor (FII) allocations to emerging markets, and to India in particular, in 2015 may not have been determined yet. The Nifty has meandered within a trading range since the US Federal Reserve concluded its policy meet in December 2014.

The superstitious will note the Nifty fell 666 points from its all-time high of 8,627 to a low of 7,961 on December 17, 2014. It bounced back above 8200 and it has since maintained values of above 8,150. On the upside, there has been profit booking above 8,450.

So, the index has meandered between 8,150 and 8,450. It would be difficult to discern a serious directional trend until there is a move that pulls outside the zone. The Nifty moved very quickly from 7,900 to 8,600 and then the December correction retraced that entire 700-point zone.

Thus, there has been a fair amount of trading. The next bounce must beat 8,627 to register higher tops and confirm that the bull market remains in force. On the downside, a fall below 7,960 would be significant in setting up a bearish pattern of lower lows. Short-term traders might assume congestion at every 50-point interval.

Given the Fed's policy statement, traders expect the Reserve Bank of India (RBI) to cut rates more or less immediately after the Budget, and that will be long before the Fed increases dollar rates. The Bank Nifty and other financial stocks have moved up sharply to a succession of new highs, on hopes of a rate cut and also assurances of less political interference for public sector banks from the Prime Minister. This could drive the overall market up, given the high weight (and high-beta nature) of the financial sector. However, the rupee remains under pressure compared to the dollar and rate cuts could  lead to the rupee sliding.

FIIs’ attitude will be crucial to market direction and to dollar-rupee rates as well. In December 2014, FIIs started buying Indian debt in quantity, which indicates expectations of rate cuts. If they push sufficiently large investments into India, that could also counter-balance rupee weakness. Otherwise, a long dollar-short rupee stance might be worth taking.

The Bank Nifty has hit new all-time highs, rising above 19,100. This uptrend might be worth trading with a long futures position. Short-term traders should assume support/resistance zones at 150-point intervals on the Bank Nifty. The futures closed Monday at 19,140 with spot at 19,017. A short strangle of short 18,500p (152) and a short 19,500c (216) fetches a net inflow of 368 in premium. This would lose money only if the Bank Nifty moved outside 18,132, 19,868. It might be worth holding for three-to-five sessions in the hope of premium decay.

The Nifty Call chain has open interest peaking in the range between 8,400c and 9,000c. The Put OI peaks between 7,800p and 8,400p. The put-call ratio is quite healthy at about 1.2 for January, and also for the three-month range.

The spot Nifty closed on Monday at 8,378, with the futures at 8,424. The close-to-money (CTM) bearspread is tempting for January with a long 8,300p (62) and a short 8,200p (39) costing 23 and offering a highest possible return of 77. The CTM bullspread is much closer to money and not attractive with long 8,400c (119) and short 8,500c (71) costing 48 and paying up to 52. Bulls should consider a wider long 8,500c (71) and short 8,600c (38) costing 33 and paying a maximum 67. Even this has a less attractive risk:reward ratio than the CTM bearspread.

The asymmetric premiums indicate optimism. A strangle combination of long 8,500c, long 8,300p, short 8,600c, short 8,200p, costs 55, and breaks even at 8,245, 8,555.