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The market eased down below Nifty 10,450 in the first session of the New Year. There was heavy selling in the last hour, targeting banks automobiles and energy stocks in particular. Given that the recent all-time high of 10,552 was scored just last Wednesday, this correction will not be cause for immediate alarm.
The long trend remains bullish. The first level to watch for bears would be around 10,350, which is the next support. If that is broken, there’s support at every 50 points or so down, with the key recent support being at 10,075, which was briefly hit on the morning of the Gujarat election results.
The January settlement is extremely important for several reasons. The first is, it will give us an inkling of the foreign portfolio investment (FPI) attitude in a new financial year for them. The second is that the Budget on February 1, will start being discounted during this settlement. More fundamental data should also be coming in.
The third is, corporate earnings season and market responses. If GST has settled down, corporate earnings should grow quickly in October-December 2017, because Quarter 3, 1017-18 should also gain from a low base effect.
By definition, the long-term and intermediate trends are up. Trend following signals suggest keeping a buy on the Nifty with a stop at 10,300. The VIX stabilised at lower levels and it is rising again. On the upside, the level to watch is 10,550, that could be broken in one big session.
FPIs were net sellers in December but net buying from domestic institutions was more than the FPI selling. Traders must remain braced for currency volatility due to Brexit. But, the central bank policy reviews in December indicated that status quo will be maintained if possible. The worries about higher oil prices are accentuated by turmoil in Iran, which causes fear of supply disruption.
This bounce started from support at 9,675-9,700. The 200-Day Moving Average is around 9,750-9,800. In the longer-term, the Nifty moved North in December 2016 from 7,900 levels to a high of 10,550, twice in December 2017. The index has bounced twice from 9,675 since December 2016.
The Nifty Bank rebounded less strongly than the Nifty post-Gujarat elections. The "Bank" is currently at 25,435 after falling from a high of 25,953 and bouncing from 24,620. A strangle of long January 25, 26,500c (35), long January 25, 24,500p (85) costs 120 This position is nearly zero-delta. It would take three big trending sessions for one side to be hit.
A trader could take this and sell short January 11, 26,500c (7), short January 11, 24,500p (15) to reduce net costs to 98, if the short strangle expires without being hit. This net long-short position could give a big payoff if the financial index stays volatile.
The Nifty's Put-Call Ratios are not so useful so long to expiry. The Nifty closed at 10,435 on Wednesday. A bullspread of long January 10,600c (77), short 10,700c (42) costs 35 and pays a maximum 65 and this is 165 points from money. A bearspread of long January 10,400p (92), short 10,300p (63) costs 29, pays a maximum of 71 and is only 35 points from money. The premium asymmetry indicates the optimistic stance of the market.
The short-term trading view could be bearish though this breaks the rule of playing against the long-term. In that case, buy the bearspread (long 10,400p, short 10,300p) because the risk :reward Equation is quite favourable.
However, this is a dangerous move in that the market may rebound to a new high. Historically, the market tends to be optimistic going into a Budget so, it's reasonable to expect a surge in the last two weeks of the settlement.
