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The market has been tightly range-bound for the past week and it has no sense of direction. Liquidity has been reasonable in terms of volume but breadth has also swung with the advance-decline ratio moving from negative to positive successively. Institutional support has been tepid and net-negative in the past five sessions.
The Nifty bottomed out above 5,950 last week, which is above the key area of the 200 Day Moving Average (DMA) of 5,865-5,900. Upside has been restricted with the index unable to break out past resistance in the 6,200-6,225 zone. This has meant ranged trading between 6,025-6,200. There are multiple congestion points in this zone at roughly 50-point intervals.
To establish a new trend, the index will have to either drop below 5,970, a level it has tested twice, or rise above 6,342, which is the 52-week high. A sustained breakout at either end will lead to a target of 5,750-5,800 or 6,500. The long-term trend looks positive, given support well above the 200 DMA. But the intermediate and short-term trends are both indeterminate and this makes life difficult for a short-term trader.
The Bank Nifty has also been indeterminate in trend. The last few sessions have seen the Bank Nifty holding out above support at 10,700-10,800 but it looks more likely to fall than to rise. On the downside, if 10,700 is broken, the index could drop till 10,000 levels while on the upside, it would hit resistance at 11,200 and then at 11,500. A long 10,500p (195) and long 11,500c (179) is a possible position though it’s not zero-delta.
Better to wait for the December settlement to start, since both premia could reduce in value. The IT and pharma sectors are both looking weak. Balanced against that, the oil and gas PSUs have seen some speculative bullish action and there has been a bounce in capital goods stocks like Crompton Greaves, L&T, BHEL and ABB.
The Nifty’s put call ratios (PCR) are in bearish territory though this signal is of dubious value close to settlement. The November PCR is at 0.92 while the three-month PCR is at 0.93. My interpretation is that there’s nervousness about potential downturns.
One factor could be assembly elections results due in early December. If there are strong gains for BJP, there could be a lot of inflows. In next settlement, Nifty could move well over five per cent in either direction. In fact, a breakout from the current range-trading pattern will more or less guarantee that. A trader should stay braced for the Nifty to move anywhere between 5,700 to 6,400 in the next 10 sessions.
For the one-session perspective of the settlement session, a trader could be tempted to go with a long 6,000p (4) and a long 6,100c (12). If either end is hit, there will be quick return. From a five-session perspective, a bullspread of long Dec 6,200c (100) and short 6,300p (65) costs 35 and yields a maximum 65. Closer to money, a long 6,100c (146) and short 6,200c costs 46 and yields 54. A near-the-money bearspread of long 6,000p (90) and short 5,900p (61) costs 29 and pays a maximum 71. A wider bearspread of long 5,900p and short 5,800p (40) may also be tempting since it costs just 21.
Obviously, the near-the-money bearspread has a good risk-return ratio. A strangle combination of long 6,200c, long 5,900p, and short 6,300c, short 5,800p costs 56 and yields a maximum one-way return of 44. Given the adverse risk-return return with such a far-from-money spread, it’s better to wait for premia to settle down.
