The Nifty appears to be going through a phase of consolidation. It's remains comfortably above its own 200-Day Mo-ving Average (DMA), which strengthen the possibility of a reversal in the major trend from bearish to bullish. As of now, the intermediate and short-term trends are neutral.
Institutional support has been good and foreign institutional investors (FIIs) have been net-positive through early February. The dollar-rupee rate has strengthened to below 50 on the back of strong FII buying. The resolution of the Greece situation hasn't had much impact yet on either the forex market, or FII attitude.
In the short term, the market's next upside target would be somewhere between 5,400 and 5,600. On the downside, the key support level to watch is 5,200-5,250 because that's where the 200-DMA is trending. If the market dips below 5,200, we'll have to characterise this move as a bull-trap that sucks in long-traders disastrously. Range trading within the band of 5,225-5,450 would not clarify the trend of the market.
The daily high-low volatility has been on the low side, as the market has settled into range trading. The index has tended to open 25-50 points above the previous close. This indecisive pattern might continue until the elections end and we have some clarity on Budget and new political alignments.
Among subsidiary sectors, the CNXIT is holding above support at 6,250, with the next support at 6,100. The Bank Nifty has moved above 10,300 and the key support would be 10,000. Both indices are looking indecisive as well. The Bank Nifty is most likely to lead direction for the overall market. Watch telecom stocks as well, since they could be hyper-sensitive, given news flow.
The Nifty put, call ratio (PCR) is now in an overbought zone with the February PCR at above 1.6 and the overall PCR at above 1.5. This could be a signal of an impending correction or a short-term phase of profit-booking.
Option chain examination shows that February call open interest (OI) is concentrated between 5,400c(80), 5,500c (35) and 5,600c (12). The February Put OI is focused between 5,100p (7), 5,200p (14), 5,300p (31) and 5,400p (62). One would guess that consensus expectations are between 5,100 and 5,600. There is some expiry effect already, since February is a short settlement and premiums at one step away from money may be cheap.
The money bullspread of long February 5,400c (80) and short 5,500c (35) costs 45 and pays a maximum of 55. One step further away, a long 5,500c and short 5,600c costs 23 and pays maximum 77. The on-the money bearspread of long 5,400p (62) and short 5,300p (31) costs 31 and pays a maximum 69, while a long 5,300p and short 5,200p costs 17 and pays 83. The risk:reward ratios are pretty good even for the on-the-money positions but a big swing could really set up profits for a trader who moves 100 points away.
Looking at strangles, we can combine a long 5,300p and long 5,500c with a short 5,600c and short 5,200p. This would cost 40 and pay a maximum 60. But a move away till the long 5,200p (14), long 5,600c (12), short 5,100p (7) and short 5,700c (3) is tempting. This would cost around 16 and pay a maximum 84 in theory, with breakevens at 5,184, 5,616.
