Broader trend is sideways

The market has made a partial recovery after discounting the long awaited hike of the US policy interest rate last week. Support held at above Nifty 7,550 and the index has since bounced to above 7,800.

However, the trends continue to look bearish, with this movement looking like a combination of a small relief rally and some shortcovering. The long-term trend must be considered bearish since the Nifty is trading well below its own 200-Day Moving Averages (200-DMA) and has done so, since late August 2015. The simple 200-DMA is at 8,230, while the exponential 200-DMA is at 8,085, according to the NSE's calculations.

The global mood continues to look nervous. The drop in crude prices (and of associated energy commodities) awakens threats of deflation. Projections of growth for next year are very conservative. The yuan is also being devalued and the euro has seen a long period of weakening, with negative policy rates. The rupee has held above historic lows against the dollar but could actually gain against the euro, yen and yuan.

Foreign institutional investors (FIIs) continue to be consistent net sellers of rupee equity and debt. Retail investors are net-positive, albeit with reduced volumes. Domestic institutions are also net positive. Volumes have dipped going into financial-year-ending for FIIs.

The saving grace is the Nifty has registered higher lows after the Fed hiked. As of now, this might mean a period of sideways movement or a continuing rally if there is enough surplus demand created by retail and domestic institution to absorb FII selling.

  The market looks likely to trend sideways. If the index can bounce till above 8,250, it would be a very positive signal. That is a long way off. On the downside, any low above 7,550 would be accounted mildly positive. A sideways movement between 7,550 and 7,950 looks most likely.

The Bank Nifty looks more bearish than the overall market but could also bounce more sharply. The option trader could look at a strangle of long December 16,500p (69) and long 17,100c (73), with the index at 16,800. This costs 142. It will hit breakeven if there's one big session and it could be highly profitable if there are two big trending sessions in either direction. That's quite possible.

The Nifty's put-call ratios remain bearish, hovering at 0.85-0.9, despite the recovery in index values. The call chain for December has ample open interest (OI) between 7,800c and 9,000c, with a big peak at 8,000c, and lower peaks at 8,500c, 9,000c. The December put chain has big OI peaks at 7,500p and 8,000p (in the money) and excellent OI till 7,000p.

There are just two weeks left till expiry and premiums have tightened as a result. There is a fair amount of volatility however, and current premiums may be underestimating that. The Nifty traded at 7,835 on Monday with the futures premium at almost zero. A bullspread of long 7,900c (38), short 8,000c (14) would cost 24 and pay a maximum of 76 - this is at 65 points from spot. A bearspread of long December 7,800p (46), short 7,700c (21) costs 25 with a maximum payoff of 75 and this is at 35 points from spot.

Both spreads are reasonably attractive in themselves. These two near-the-money spreads could also be combined for a set of long-short strangles. That strangle set would cost 49, with a possible pay off of 51. The breakevens are at 7,751, 7,949, and either point could be hit in one big sessions. This is why the implied volatility might be lower than warranted by current market conditions.