)
A small correction yesterday left the market trading high. The Nifty closed just below 6,300. It has range-traded with an upwards bias through most of December. Volumes were moderate. Breadth was good – in fact, the advances-declines ratio was very positive. As usual, foreign institutional investors’ (FII) action has been low in the Christmas-New Year period. This is not only a holiday period, it is the reporting year-end for many FIIs.
Technically speaking, the market remains in a bull run. The Nifty hit an all time high on December 9, at 6,415. That is the benchmark for the long-term trend. On the downside, there has been support in the 6,150 zone and above. The short-term and intermediate trend appear to be in a period of range-trading between 6,200 and 6,400. Day-traders can split that zone up in 50-point mini-ranges since there is congestion at roughly 50-point intervals.
A move beyond 6,415 to a new all-time high would clearly be positive. A move below 6,200 would hit support at 50-point intervals. Going by breadth signals, option premia and futures premia over spot prices, the range trading pattern is more likely to end with an upside breakout that leads to new all-time highs.
There are some possible bearish factors however. The Reserve Bank of India (RBI) could raise rates if inflation doesn’t come down. The FIIs could cut India allocations once the tapering actually comes into play. The Bank Nifty would be especially vulnerable to any rate hike. The financial index is stuck inside a range of roughly 11,200-11,700. Breakouts from this range, as and when they occur, could be till around 10,600 or 12,300. Any trending move by the Bank Nifty is liable to influence the broader market since banks have a big weight in the Nifty. There has been some positive action in realty stocks, followed by a sell-off. Metals are looking positive.
The dollar-rupee rate has been ranged. The rupee has gained because of net FII inflows. There are expectations that the dollar could harden once tapering starts. The IT sector has been a great performer through 2013. There were been some corrections in IT stocks on Monday and there could be another bounce if the dollar gains. The put-call ratio of the Nifty has dropped into bearish territory. The PCR has dropped to 0.9, mainly due to disproportionate call carryover. The market could be over-bought. But the PCR is also not a reliable indicator two days into a long settlement.
Most trend-following systems indicate staying long. The January settlement concludes on the 30th and there is a good chance that it will be a big month. Traders could assume that the Nifty will stay within the bounds of 6,050-6,450 for the next five sessions. Breakouts or breakdowns beyond this zone could hit 5,850 or 6,650.
It's possible to move away from the money in option spreads. A long January 6,400c (73) versus short 6,500c (39) costs 34 and pays 66. This position is well out of money with the Nifty at 6,291 and the futures held at around 6,349. A long 6,200p (56) and short 6,100p (33) costs 23 and pays 77. This is also some distance from the money but it has a better risk:reward ratio. The differentials in premium are indicative of the bullish sentiment. Strangles don't have good ratios. If we look at a zero-delta position combining the above spreads for a long 6,400c, long 6,200p, short 6,500c, short 6,100p, the position costs 69 and a pays a net 31. It would be better to wait out a few sessions until we get a better sense of FII attitude in 2014.
The author is a technical and equity analyst
