The market has meandered in-between clear resistance above 5950 and strong support below 5,850 for the last week of the December settlement. A strong move yesterday may have been inspired partly by short-covering. The breakout and uptrend still remain valid since the market has consolidated above the breakout level. The key levels to watch are 5,820 and 5,965. A drop below 5,820 (which was the 52-week high before the November breakout) would mean a reversal in the intermediate trend. So this is a crucial support level. A drop below 5,775 would signal a failure of the November breakout. The most recent 52-week high is 5,965 and if the trend remains bullish, this mark should be beaten soon.
The Nifty must be rated bullish in the long-term and trader would have to take this bias into account. The short-term trend is uncertain due to the range-trading pattern we've seen for the past three weeks. The intermediate trend is also unclear. Successive new highs have been established since the breakout but the Nifty has also tested support just above 5,820.
Volumes remain good. The FII attitude stays net positive. DIIs remain net sellers. December has been volatile for currencies. The dollar hardened till near the 55 level. It could swing down now if the fiscal cliff exerts pressure.
The Bank Nifty also maintains a bullish long-term profile and given its high-beta relationship with the Nifty, the direction of the financial index is crucial. Despite the RBI's no-action policy, financial stocks have looked to be uptrending on the basis of the Banking Bill. A move beyond 12,700 could be on the cards early in the January settlement.
In the immediate future, it's likely that the settlement session itself will see range-trading. A trend-defining move in the first 10 sessions of January settlement is quite likely. The favoured direction is bullish and the Nifty option premiums reflect that since they are heavily skewed in favour of calls. But any correction below 5,775 may be quite deep.
Examining option chains for December, a key point to note is that the in-the-money December 5,900c (26) and the on-the-money December 5,900p (11) have respective breakevens at 5,926 and 5,889. Even combining the two would give breakevens at 5,937 and 5,863. The index is unlikely to swing beyond 5,860-5,940 until settlement ends.
The January call chain has high open interest between 6,000c (80), 6,100c (43) , 6,200c (21) and 6,300c (10) with a lot of OI at 5,900c (134) also. The put chain has high OI from 5,500p (7.5), 5,600p (13), 5,700p (23), 5,800p (41) and 5,900p (70). Note the skewed premiums. Since the underlying index is at 5,905, puts and calls are equidistant from money. The short-term expectations of the next four sessions would be between 5,700-6,200. Looking at the first week of the Jan settlement, the on-the-money bearspreads offers an attractive return. The bearspread of long Jan 5,900p (70) and short 5,800p (41) costs about 29 and pays a maximum 71. Move one step away for a bullspread of long Jan 6,000c (80) and short 6,100c (43) at a cost of 37 and a maximum payoff of 63. Strangles are zero-delta and may be taken one step from money. A long 6,000c, long 5,800p, offset by a short 5,700p and short 6,100c costs 55 and pays 45. The ratio is adverse.