Multiple resistance above 4,900 on Nifty

The Nifty has slowly inched up in a series of mini-sessions. It seems to be consolidating between 4,800 and 4,900. The short-term trend seems mildly positive. Breadth indicators are neutral. Volumes are average, overall advance-decline ratios are slightly negative. There's not been much institutional action yet in 2012.

Intra-day volatility has dropped a lot and so has implied volatility. One would say the long-term trend remains bearish. Traders are waiting for developments in Europe after the latest rating downgrades and also for Q3 results. The rupee remains weak but it has stabilised a little. The euro downgrade could lead to a dollar strengthening, which might hit the rupee as well.

Given support at 4,600 was broken, the next big breakout is somewhat more likely to be a slide to the 4,300-level than a positive move. On the upside, the index has multiple resistances above 4,900. As the Europe scenario clarifies, and volumes pick up, daily swings will widen. Opening gaps of 25-50 Nifty points will continue to be normal.

Among subsidiary sectors, the CNXIT seems weak after the Infosys guidance but results of TCS and HCL Tech, etc, may change sentiments. The CNXIT has slid till 5,900 but it could climb back till 6,100-6,200 if TCS reverses sentiments. Otherwise, a fall till 5,600 is possible.

The Bank Nifty is being buoyed up by hopes of rate cuts. If those are belied, it would be due for another crash till the 8,100-8,200 level. Financials are likely to see frantic action late into the January settlement with the Reserve Bank on India's next credit policy due on January 24.

The Nifty put call ratio (PCR) has moved into a healthy zone of 1.4. In the January call series, open interest (OI) peaks at 5,000c (29) with ample OI at 4,800c (127) and 4,900c (67). In the January put series, OI peaks at 4,700p (19) but there's ample OI both above, at 4,800p (41), and below, at 4,600p (9) and 4,500p (5).

Consensus expectations are therefore, spread across 4,500-5,000. Swings beyond those limits would cause panic covering, if they occur. I suspect the implied volatility of current premiums is understated, especially at one step away from money. Given the risk:return ratios, despite a shorter time till expiry, it's possible to better to bet on breakouts.

A close to money bullspread of long January 4,900c (67) and short 5,000c (29) costs 38 and pays a maximum 62. The close-to-money (CTM) bearspread of long 4,800p (41) and short 4,700p (19) costs 22 and pays a maximum 78. The risk:return ratios are quite good. Even a combination long-short strangle of these CTM spreads would cost 60 and offer a maximum one-way return of 40, which is ok since both sides of this strangle could be hit very easily.

We can look for slightly wider spreads as well. A long 4,700p (19) and long 5,000c (29) costs a maximum 48 and it can be offset with a short 4,600p (9) and a short 5,100c (9). The total cost would be about 30. This long-short strangle combination offers a maximum one-way of 70 and it has breakevens at 4,670, 5,030. Both sides of the strangle could pay off, if the market just develops a little more intra-day volatility.