Upward breakout likely in January

The Nifty is still trading in a narrow range. Yesterday, it tested the upper limits while maintaining support above 5,950. As and when, there’s a break out, the market could swing 250 points. Since the low of 5,690 (November 26) has not been violated, we have hopes the next move would be upwards.

The key points to watch are 5,690 and 6,070. A break out beyond either would establish a lower low (<5690), or higher high (>6070). The Nifty closed very near the top of the zone yesterday at 6,060, so an upside break out on a good settlement session is possible. Break outs in early January could move till 5,500 or 6,300. Resistance and supports inside the zone are at approximately 50-point intervals.  The 200-day moving average is at around 5,610.

Volumes have eased, we would expect expansion in the New Year. Advance-declines ratios are positive. Institutional attitude is net negative now and institutional commitment is low. The FIIs might return in force in the New Year which is also a new financial year for them, but we can’t make a call on attitude.

Carryover is fair — around 30-35 per cent of index derivative open interest has moved beyond December. The put call ratios for Nifty options are at better-than-normal positive levels and may indicate a strong settlement. The December PCR is above two.

Of the subsidiary indices, the CNXIT has looked good but range-traded the past few sessions. The Bank Nifty has been under pressure but it climbed above resistance at 11,550, though that could be temporary and fuelled by short-covering. If one is taking futures positions with an early Jan perspective, the long side looks more attractive.

In the Nifty, traders should prepare for moves between 5,900 and 6,200 on settlement and the possibility of a break till 5,600 or 6,250 in the next five sessions. Close to money January bearspsreads have better risk:reward ratios than January bullspreads.

A long Jan 6,100c (111) and 6,200p (65) costs around 46 and pays a maximum of 54. A Jan bearspread of long 6,000p (66) and short 5,900p (42) costs 24 and pays a maximum 76. Obviously the bearspread looks better with the underlying almost midway at 6,060. If you wish to gamble on a possible upside breakout today, a naked long December 6,100c (8.5) may be profitable. The returns would be excellent if the market moves past 6,108.

A combination long-short Jan strangle can be taken with a long 6,300c (34), long 5,800p (28), and short 6,400c (17) and short 5,700p (18) for a net cost of 27. Breakevens are at 5,773; 6,327. This is a position to be held with a perspective of 10 sessions at least.

My sense is that a breakout of some kind is extremely likely in January simply on the basis of institutional volume expansion. As of now, the chances that it will be an upwards move look good. This is on the basis of chart patterns, of strong put-call ratios and of the elapsed time period for the current intermediate trend. Hence, avoid naked shorts and spreads like butterflies, which work in range-trading markets.