The market is consolidating in a new zone. The perspective remains bullish. The key levels to watch in the short-term would be 5,900 and 5,820. The domestic focus would be on the Winter Session of Parliament this week. Traders will also watch the US "fiscal cliff".
The short-term support for the Nifty is at the previous 52-week high of 5,820. This is crucial support and a drop below 5,775 would signal a failure of the breakout. The most recent 52-week high is 5,899. This must be beaten if the bullish trend is to be maintained. The target remains 6,050-plus.
A breakout in these circumstances could mean a strongly-phased movement beyond the minimum upside targets. The Nifty remains far above its own 200-Day Moving Average. It's likely that any trend established in December will persist through early 2013. Volumes were good and advances outnumbered declines.
The FII attitude continues to be net positive and is the chief driver. DIIs remain net sellers. The USD gained on Monday as the oil PSUs bought USD. The Euro also strengthened. A paired trade of long EURINR and short USDINR could be a good bet.
December is often a volatile month for currency as well as equities. FIIs could indulge in some selling now to lock in their profits ahead of financial year-ending. Or they might try to add some quick capital gains by pushing the market up further.
The Bank Nifty is also testing highs and likely to lead the overall market. The key support would be 11,900 while it needs to beat resistance above 12,150 to continue the uptrend. The CNXIT has been less bullish than the overall market. But it may be a good hedge against downturn. There has been some switching from defensive sectors like Pharma and FMCG to cyclicals like Realty and Finance.
Traders should remain braced for a big move in December. The favoured direction is bullish naturally but any correction below 5,775 could be quite deep.
The December Nifty put-call ratios are about 1.35 while the overall three-month PCR is 1.28. This is healthy and in the bullish zone.
The option chains suggest traders are expecting a swing of between 5,400 and 6,100. The December call chain has high open interest between 5,800c (150), 5,900c (89), 6,000c (46) and 6,100c (21) with the OI peak at 6,000c. The put chain has high OI from 5,400p (5) , 5,500p (7), 5,600p (12), 5,700p (22) and 5,800p (42) with a very even OI distribution.
The underlying index is at 5,870 with the December Nifty futures at a premium of 45. So option positions aren't zero-delta. The premiums are heavily skewed in favour of calls. The very short-term expectations of the next four sessions would be between 5,750-6,000.
Near-the-money return to risk ratios are okay for bearspreads, and expensive for bullspreads. The bullspread of long Dec 5,900c (89) and short 6,000c (46) costs 43 and pays a maximum 57. The bearspread of long Dec 5,800p (42) and short 5,700p (22) costs 20 and pays a maximum 80.
The bullspread is almost on the money. Strangles aren't attractive due to premium imbalance and high pricing close to money. A long 5800p, long 5,900c, short 5,700p and short 6,000c combination costs 62 and pays a maximum 38 with breakevens at 5,738, 5,962.