Short-term trend is down

The Nifty hit a new 52-week high as the Reserve Bank of India (RBI) finally cut rates in its credit policy yesterday. But by the end of the credit policy session, the market had reacted with a lot of selling. A look at outstanding positions suggests there will be some more selling going into the settlement.

The index hit a high of 6,111 and reacted to support at 6,040-6,050. The next support is at 6,020 and there are successive zones of support further down. The current trend reading would suggest the short-term trend is down, the intermediate trend is uncertain and the long-term trend is up.

On the downside, a breakdown below the 5,940-5,950 support would lead to a reversion to range trading between 5,820-5,965 and confirm a weak intermediate. On the upside, the Nifty would have to beat 6,111 to confirm the uptrend.

The RBI’s minimum rate cut just about fulfilled consensus expectations and a lot of disappointed bulls who were hoping for a 50 basis point cut will have to unwind their positions. The Q3 results have come through for many of the heavyweights and by and large, met expectations. The financial index also hit a new high at 12,950-plus and there should be a positive effect on both banks and non-banking financials as well as rate-sensitives.

Despite disappointment among the tired bulls, the market could consolidate through the settlement and surge again in the February settlement. Volumes remain good. The FII attitude is net positive. Domestic institutional investors remain net sellers. Volatility in the USD is likely to continue but the rupee may strengthen further.

Technically, the signals suggest that traders should remain bullish with a two-three week perspective. The market has seen successive new highs and so have many stocks. However, there is a need for stop-losses and there could be a short, sharp correction. The end of settlement and carryover may involve high volatility through the week.

In the immediate future, with the index at 6,050, a Jan 6,000p (12) and a Jan 6,000c (10) are cheap due to expiry. The zero-delta nature of these two options which are equidistant from money, and the promise of high volatility makes a long strangle look attractive. There could be profits from both options at different times even if they are not struck.

The February call chain has high open interest (OI) between the in-the-money 6,000c (142), 6,100c (85) , 6,200c (45), 6,300c (21) and 6,400c (9) with a big OI bulge at 6,200c. The put chain has high OI from 5,700p (11), 5,800p (18.5), 5,900p (32), 6,000p (57) and 6,100p (97). Given Nifty at 6,050, traders can afford to bet on slightly wider spreads.

Consensus trading expectations for February seem within the 5,700-6,300 range. This implies a potential rise of 250 points balanced against a possible drop of 350 points. The February strangle of long 6,000p and long 6,100c costs 140-150, with breakevens at roughly 5,850, 6,250. That is the maximum swing expectation in the next three-four sessions. A brave trader could sell the 5,800p and/or the 6,300c, hoping to buy back cheaper by February 4 or February 5.

The bearspread of long Feb 5,900p (32) and short 5,800p (18.5) costs about 13.5 and pays a maximum 86.5. A similar wide bullspread of long 6,200c (45) and short 6,300c (21) costs 24 with a maximum payoff of 76.