The Nifty tested resistance near its 52-week high in the first session of the new year. The strong move was inspired by hopes the US would avert the fiscal cliff. A breakout beyond Nifty 5,965 to a new 52-week high would be strongly bullish. If the market fails to cross 5,965, it would revert to trading within the range of 5,820-5,965. So long as the market stays above 5,820, the breakout in late November remains a valid buy signal.
Successive new highs have been established since the breakout but the Nifty has also tested support just above 5,820.
A rise past 5,965 would set up targets in the range of 6,100-6,150. A drop below 5,820 would mean an intermediate trend reversal. A drop below 5,775 would signal a failure of the November breakout.
The Nifty must be rated bullish in the long-term. The short-term trend looks to be positive now but newsflow out of the US may be critical. Volumes remain good. The attitude of foreign institutional investors (FIIs) stays net positive. Domestic institutional investors remain net sellers.
The USD could see violent moves as well. If US Congress vote doesn't go as expected, there will be a short-term hardening of USD versus rupee since this will probably trigger some FII outflows. On the other hand, if the US averts the cliff, FII inflows could lead to rupee strengthening.
The Bank Nifty also maintains a bullish long-term profile and it has hit a new high at 12,663. Given the high-beta relationship with the Nifty, the direction of the financial index is crucial. Financial stocks, including PSU banks, have looked to be uptrending. A move beyond 12,700 looks on the cards and a move till 13,000-plus is possible, assuming positive US newsflows.
A trend-defining move in the first 10 sessions of January settlement is therefore, quite likely. The favoured direction is bullish and the Nifty option premiums reflect that they are heavily skewed in favour of calls. But a correction till 5,820 may occur if US bipartisan negotiations break down and any correction below 5,775 may be quite deep. Examining option chains for January, the put-call ratios are healthy.
The January call chain has high open interest between 6,000c (91); 6,100c (48); 6,200c (22) and 6,300c (9) with a lot of open interest (OI) at 5,900c (152) also. The put chain has high OI from 5,600p (6); 5,700p (11); 5,800p (23) and 5,900p (44). Note the skewed premiums. Given an index at 5,950, the 5,900p and the 6,000c are equidistant but the call costs over twice as much.
The expectations over the settlement would be between 5,600-6,300, implying a swing of 350 points each way is possible. On-the-money bearspreads offer attractive returns. The bearspread of long January 5,900p (44) and short 5,800p (23) costs about 21 and pays a maximum 79. A corresponding bullspread of long January 6,000c (91) and short 6,100c (48) costs 43. Bulls can move further away for a long 6,100c and short 6,200c for a cost of 27 and maximum return of 73.
Strangles could be taken zero-delta but given the premium skews, they can be skewed.
A long 6,100c, long 5,900p, offset by a short 5,800p and short 6,200c costs 48 and pays 52. Breakevens would be at 5,852 and 6,148 with the puts closer to money.