Short term trend may be down; Nifty support around 10,125
The market rebounded from near 10,100 on last Wednesday and it has since tested upside resistance at 10,325. However, there are still net losses in the November settlement. The near-term signals are hard to decipher.
After hitting a high of 10,490 on November 6, the market has reacted to a recent low of 10,094 on November 15. Weak macro-economic data and average second quarter (Q2) results were balanced by the sentimental driver of the Moody’s upgrade. However, that impetus seems to have petered out.
Higher global crude prices are causing some anxiety and every trader is braced for currency volatility in December. But, corporate results could see year-on-year gains given low base effects. The market is also braced for the Gujarat assembly elections, which could be a sentiment trigger one way or another. Interestingly, foreign portfolio investments (FPIs) have been net buyers in November and so are domestic institutions. But, there’s been enough retail selling to pull the market down slightly. Given the recent new highs, the long trend is defined as bullish. But, the short-term trend may be down. It is too early to judge the intermediate trend, we need to see either a pattern of lower highs, or lower lows.
Trend following signals are indeterminate in the shortterm. The advance decline ratio is nearly flat. The VIX is in calm territory and it has slid following the two per cent recovery from 10,100 to 10,300. There’s a lot of support between 10,100 and 10,125. A drop below 10,095 and a close below that market would strongly suggest an intermediate downtrend.
In a longer perspective, the bounce started from support at 9,675-9,700. The 200-Day Moving Average is around 9,650, well below the current levels. Taking a longer-term view, the Nifty moved North in late December 2016 from 7,900 levels to a high of 10,490 in early November. The Index has bounced twice from 9,675 during this 11-month period.
The Nifty Bank has been an outperformer in the last month or so, gaining more ground than the Nifty. After hitting a recent all-time high of 25,925 it has stabilised closer to the that high mark. The Bank is currently at 25,770. A strangle of long November 30, 26,500c (42), long November 30, 25,000p (38) now costs 80. This is nearly zero-delta. A trader could take this and sell short November 23, 26,200c (32), short November 23, 25,400p (22) to reduce the net costs to around 26. This net strangle position is not a calendar spread because the strikes are different. But, it could give a big payoff if the financial index remains volatile. Two big trending sessions could take this into the money.
Two other sectors are worth tracking. One is energy, given an uptrend in crude prices. The second is information technology (IT) because the rupee is trending down and IT stocks are generally inversely correlated to the rupee.
The Nifty’s Put- Call Ratio for November is bearish at around 0.9. The November Nifty call chain has peak open interest (OI) at 10,500c, and high OI until 11,500c. The November put chain has very high OI between 9,500p and 10,300p, with peaks at 10,000, 10,200 and 10,300.
The Nifty closed at 10,298 on Monday. The 10,300p (66), 10,300c (88) has very asymmetric pricing breakevens are at approximately 10,455, 10,145. A bullspread of long November 10,400c (45), short 10,500c (22) costs 23 and pays a maximum 77. This is about 102 points from money. A bearspread of long 10,200p (35), short 10,100p (18) costs 17, pays a maximum of 83 and about 98 points from money.
Obviously the bearspread is more attractive in terms of risk: return. This long-short set of strangles is also more or less zero-delta. Combined it could cost 40 and give breakevens if the index hits 10,160, 10,440 by November 30.