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The market could be on the verge of an upside breakout though this can't be confirmed. Good results from Infosys and lower rates of consumer inflation appear the bullish drivers. There are signs the foreign institutional investors (FIIs) could be returning as net buyers.
The Nifty tested resistance above 6,250 after range-trading in 6,150-6,250. If it sustains above 6,250, the key test would be one of resistance above 6,400 and, hopefully, a breakout to an all-time high.
Lower retail inflation makes it more likely the Reserve Bank of India (RBI) will hold rates or cut those, if the wholesale price index (WPI)'s rate of change also dips. The weak index of industrial production (IIP) could induce the RBI to move with a cut on January 28.
The Nifty closed above 6,270 on Monday. If the breakout sustains, the index will have to test resistance at 50-pt intervals till it moves above 6,400. The key drivers for the broad market could be the Bank Nifty and the CNXIT.
Good results from Infosys have pushed Infy, HCL Tech and Tata Consultancy Services (TCS) to new highs. If TCS and HCL Tech confirm the strong sector trend, Wipro, Mindtree, Tech Mahindra will move up. One retarding factor could be a weaker dollar since strong FII buying could push it down.
The Bank Nifty has more headroom to rise. It could climb till 12,000 or higher, in anticipation of an easy-money policy. There is a case for buying calls at 11,500 or higher at 12,000. The retarding factor could be poor results from banking but the market has discounted that to an extent.
Neither the Nifty nor the Bank Nifty have confirmed their breakouts. Trend failure is possible. If the Nifty halts below 6,415 or even at that level, it could trade back down till 6,200 or lower. A strong downside breakout could hit targets in 5,900-5,950. The Bank Nifty could drop till 10,500 or lower if the WPI numbers are poor, or the RBI takes a hardline.
The long-term trend continues to look bullish and the intermediate trend could have turned positive in three sessions. The short-term trend is more positive. Breadth and volumes are positive.
The put-call ratio of the Nifty has improved and moved above 1.1. We'd expect option premia to climb as volatility rises or a strong trend is established. Traders could assume the Nifty will stay in the bounds of 6,000-6,400 for five sessions but it could move beyond this till 5,850 or 6,650 by month-end.
A long January 6,300c (69) versus short 6,400c (30) costs 39 and pays 61. This position is close to money with the Nifty at 6,272. A long 6,250p (62) and short 6,150p (32) costs 30 and pays 70. This is at roughly the same distance from money.
Given the chance of higher volatility, a trader could go with wider spreads if he's prepared to hold till the RBI policy. It's possible to take a long 6,400c and a short 6,500c (11) or take a long 6,200p (46) and 6,100p(24). A combination of long 6,400c, long 6,200p, short 6,100p and short 6,500c costs a net 41 and pays a net 59 with break-evens at 6,159 and 6,441.
