)
The market eased upwards on Monday. It is still technically range-bound but it has started testing the upper end of the trading zone. If the Nifty pulls above resistance at 6,225-6,250, it could make a breakout till new all-time highs. Most probably, however, we'll have to wait for Assembly election results before a trend is clearly established. Institutional support is tepid and the upmove on Monday was driven by operators speculating on possible gains by the BJP.
The Nifty has range-traded between 5,975 and 6,225 for the past 10-15 sessions. This is well above the the key support of the 200 Day Moving Average, around 5,865-5,900. Hence, the major market trend must still be reckoned bullish. But the intermediate trend is indeterminate. The short-term trend may have gone bullish, with the index up on the past two sessions.
The upside has been restricted with the Nifty unable to breakout past resistance in the 6,225-6,250 zone. There are multiple congestion points in this zone at roughly 50-point intervals, useful since a short-term trader can set stop-losses by using those.
To clarify the intermediate trend, the index will have to either drop below 5,970, a level it has tested twice, or rise above 6,342, the 52-week high. A sustained breakout above 6,250 will probably lead to a target of 6,450-6,500 while a drop below 5,850 could lead to a target of 5,650.
The Bank Nifty has also moved up and its support will be critical for the overall market trend. The financial index is trading in the zone between 11,200 and 11,500. If it pulls above resistance at the higher end, it could be headed for 12,000-plus. On the downside, there's support at 11,000 and below, at 10,700. If 10,700 is broken, the index could drop till 10,000. A strangle of 12,000c (173) and 10,500p (123) is slightly expensive, given distance from money. It is also indicative of expectations of rising volatility in the near future.
The Nifty's put call ratios (PCR) are in neutral territory but close to bearish. The December PCR is at 1.09 while the three-month PCR is at 1.07. Incidentally, there is very little open interest (OI) in January and February contracts, well over 90 per cent of OI is concentrated in December. Major players are probably waiting for political outcomes before they start betting on the mid-month/far month. Premia are high across both calls and puts, a sign of anticipated rise in volatility, unusual in a rising market.
If the implied volatility signals are indicative, traders expect a big swing late in December. It would be sensible to stay braced for end-month value at either end of 5,700 or 6,500. Luckily, it's early in the settlement, so one can afford to take wide spreads.
The spot Nifty is at 6,218, with a futures premium of 45-50 points. A long 6,200p (121) and a long 6,300c (128) costs 250. The breakeven points of 6,450, 5,950 could be assumed to be minimum swing expectations in the 10 sessions.
A bearspread of long 6,100p (86) and short 6,000p (60) costs 26 and pays a maximum 74. This is well off the price. A bullspread of long 6,400c (84) and short 6,500c (51) costs 33 and pays a maximum 67. A strangle combination of long 6,400c, long 6,100p, and short 6,500c, short 6,000p costs 59 and yields a maximum one-way return of 41. Given the adverse risk:return return with such a far-from-money spread, it's better to avoid.
