Next 10 sessions should define the market trend

The Nifty bounced off support and appears to have turned bullish again. Support held at the key zone between 5,940-5,965 and the index closed at its highest level in 52-weeks yesterday. The next test would be resistance at 6,040-6,050, and if the market is indeed bullish, it should hit new highs within the next four sessions.

The recovery in the short-term trend should reinforce a bullish intermediate and long-term trend. A breakout beyond 6,045 could mean a target of 6,150 within three to five sessions after it occurs. The intermediate pattern suggests a target of 6,200 may be reached within settlement.

On the downside, breakdown below the 5,940-5,965 support would lead to a reversion to range trading between 5,820-5,965. A fall below 5,820 would suggest an intermediate reversal, which would be confirmed if the index fell below 5,775.

Newsflow remains critical. Q3 results are coming in. The IIP was weak but appears to have been discounted. The lower inflation trend, at least at the wholesale price level, has strengthened expectations that RBI will cut rates on January 29. Volumes remain good. The FII attitude is net positive. DIIs remain net sellers. Volatility in the USD is likely to continue with FII inflows balancing off importers' demand for dollars and at least temporarily, shoring up the rupee.

Infosys offered a positive surprise and the CNXIT climbed an amazing nine per cent last Friday and consolidated gains on Monday. Other IT heavyweights like TCS, HCL Tech, Wipro are also bullish. The Bank Nifty also saw a sharp recovery on Monday along with NBFCs – the rate cut expectations are obviously favourable. The financial index now looks set to beat its current 52-week high (12,837) and probably move past the 13,000 mark.

A trend-defining move in the next 10 sessions remains quite likely and the last three sessions of the settlement could be more than normally volatile because of the RBI policy. The put-call ratio is bullish, with the January PCR at around 1.3 while it’s around 1.20 for the three months, January-March 2013.

The January call chain has high open interest (OI) between the in-the-money 6,000c (94), 6,100c (42), 6,200c (15) and 6,300c (5) with an OI bulge at 6,200c. The put chain has high OI from 5,700p (3), 5,800p (7), 5,900p (17) and 6,000p (40). Given Nifty at 6,024, with futures at 30-40 points premium, excellent risk:reward ratios are available for spreads close to money.

Consensus trading expectations now seem to be within the 5,700-6,200 range. This implies a potential rise of 175-200 points balanced against a possible drop of 300 points. The straddle at 6,000 (long call+long put) costs 135, with breakevens at roughly 5,865, 6,135. That is the maximum swing expectation in the next four sessions.

The bearspread of long 6,000p (40) and short 5,900p (17) costs about 23 and pays a maximum 77. This is practically on the money. A corresponding OTM bullspread of long 6,100c (42) and short 6,200c (15) costs 27 even though it’s further from money. If you combine the above, a long 6,100c, long 6,000p, offset by a short 5,900p and short 6,200c, the position costs 50 and pays 50 with breakevens at 5,950, 6,150.