Intermediate trend bullish, support level at 5,965

Last Updated: Mon, Jan 07, 2013 19:31 hrs

The Nifty tested higher levels without being able to consolidate above 6,000. On Monday, there was a sharp sell-off from the 6,040 level after a new 52-week high. The key support level remains 5,965 while the resistance to beat is 6,045. The index is range trading between these levels.

The intermediate trend and the long-term would have to be reckoned bullish, given higher highs. The short-term trend may be down, if Monday's profit-booking continues. A breakout beyond 6,045 could mean a target of 6,150 within three-five sessions while the intermediate pattern suggests 6,150-6,200 is possible. A breakdown below 5,925 could lead to a reversion to range trading between 5,820-5970. A fall below 5,820 would suggest an intermediate reversal, which would be confirmed if the index fell below 5,775.

Newsflow remains critical with price-sensitive data expected on both domestic and overseas fronts. Volumes remain good. The FII attitude is net positive. DIIs remain net sellers. The Q3 results will start flowing with Infosys declaring this weekend. Macro-economic data like the IIP and WPI will also have an impact since it will influence the next Credit Policy.

The USD has seen quite a few gyrations and volatility here is likely to continue. The consensus is that the rupee should harden. The Yen is expected to weaken (as it did in 2012). The USDINR is likely to swing day-to-day however, depending on a combination of FII inflows/ outflows and demand from Indian importers, especially oil majors.

The Bank Nifty also maintains a bullish long-term profile and it has hit a new high at 12,837. Given the high-beta relationship with the Nifty, the direction of the financial index is crucial. Monday saw a sell-off here. If support at 12,600-12,650 holds, a move beyond 13,000 looks feasible. A trend-defining move in the next 10 sessions is quite likely. The range trading has reduced option premiums but there is a skew in favour of calls. The put-call ratio is reasonable for January at around 1.1 while it's around 1.25 for the three months, Jan-Mar 2013. The Jan PCR could also signal a relatively small correction.

The January call chain has high open interest between 6,000c (89), 6,100c (44) , 6,200c (19) and 6,300c (7) with a huge OI bulge at 6,200c. The put chain has high OI from 5,600p (4), 5,700p (7), 5,800p (15) and 5,900p (33) and 6,000p (66). Given the Nifty at 5990, the 6000c and 6000p are on-the-money but the call costs much more. The futures are at a normal premium of 30-odd points.

The apparent trading expectations over the settlement seem to be 5,600-6,200, implying a potential rise of 200, versus a potential fall of 400. The premium skew indicates more traders think a rise is likely. The straddle at 6,000 (long call+long put) costs 155, with breakevens at roughly 5,840, 6,160. That is the maximum swing expectation in the near-term. The bearspread of long 5,900p (33) and short 5,800p (15) costs about 18 and pays a maximum 82. A corresponding bullspread of long 6,100c (44) and short 6,200c (19) costs 25. These positions are almost zero-delta, with the bullspread a little closer to money. If you combine the above, a long 6,100c, long 5,900p, offset by a short 5,800p and short 6,200c costs 43 and pays 57. Breakevens would be at 5,857, 6,143.

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