Nifty to stay in 6,200-6,400 range for next 3-4 sessions

There has been little in the way of meaningful changes in index levels over the past week. The market has remained firmly range-bound. Background indicators suggest an upside breakout is a little more likely than a downmove but there’s not much reason to favour either direction.

The initial rounds of third quarter (Q3) corporate reports show good results from the information technology (IT) majors and not much else to cheer. Lower inflation could induce the Reserve Bank of India (RBI) to maintain its current stance or even to cut rates. Institutional attitude remains net-negative. The foreign institutional investors (FIIs) have been moderate buyers of equity (and they have bought heavily into rupee debt) but the domestic institutions have been heavier net sellers.

The Nifty has unsuccessfully tested resistance above 6,350 levels and corrected down again to test support around 6,150-6,200. The key test would be a breakout above 6,415, to a new high. On the downside, there’s support at roughly 50-points interval below 6,150. Advance-decline ratios have been positive for the broader market, which indicates that retail/operator attitude is positive. Volumes have been on the low side.

As of now, one would say the Nifty is in a long-term bull market with the intermediate trend also looking positive. However, the short-term trend is ranged or indeterminate. The Nifty closed just above 6,300 on Monday.

The key drivers for the broad market could be the BankNifty and the CNXIT. IT majors like Infy, HCL Tech, TCS and Wipro have already hit 52-week highs in the past fortnight. The dollar-rupee has been stable, with little recent volatility. The dollar has been trading at the lower end of its three-month range.

The Bank Nifty also has room to rise. It could climb till the 12,000 level or higher, in anticipation of an easy money policy. There is a case for buying calls at the 11,500 level or even higher, at 12000. As of now, the financial index is stuck between 10,700 and 11,300. An unexpected rate hike could also force it down below 10,000. A strong downside breakout could induce the Nifty to breakdown as well, with targets in the 5,900-5,950 range. So, be prepared for large fluctuations in the Bank Nifty at the end of this settlement and also for the possibility that the Nifty will move out of range-trading if the BankNifty swings sharply.

The put-call ratio of the Nifty has improved and moved above 1.2 in both January and the three-month PCR. Option premia is already showing an expiry effect. Premia is quite low close to money and this could be useful given the chance of the Bank Nifty triggering a breakout/breakdown.  Traders may assume Nifty will stay within the bounds of 6,200-6,400 for the next three-four sessions but it could move beyond this zone till either 5,850 or 6,650 by the end of settlement if the Bank Nifty does spark off a trend.

The Nifty is held at 6,304 with the on-the-money 6,300c (66) and the OTM 6,300p (47) showing skewed premia. The straddle would breakeven at 6,187 or 6,413. A long January 6,350c (41) versus short 6,450c (13) costs 28 and pays a maximum 72. A long 6,250p (30) and short 6,150p (12) costs 18 and pays 82. Both risk-reward ratios are attractive and the spreads could be combined for a long-short strangle set that has breakevens at 6,204, 6,396. It’s also possible to take a long 6,400c (24), long 6,200p (19) and a short 6,500c (7), short 6,100p (7). this costs 29 and pays a maximum 71 with breakevens at 6,171, 6,429. The strangles look quite attractive.