A jump on Tuesday altered the short-term perspective. The Nifty broke a pattern of successively lower tops as it climbed back into its previous trading range of 5,600-5,800. This suggests the earlier breakout below 5,575 was invalid.
It also means that settlement could be quite volatile, especially if there are global developments on Wednesday while Indian exchanges are shut. Tentatively, watch for a rise beyond 5,820 to a new 52-week high, or a drop below 5,600.
The short-term support for the Nifty is between 5,625-5,675, with resistance all the way through the zone of 5,750-5,820. A rise above 5,820 would set up a potential target of 6,000-odd while a drop below 5,550 would set up a downside target of 5,400. The drop below 5,600 was apparently, a false signal. There is a lot of recent trading history between 5,600 -5,800 so, continued range-trading is the most likely pattern in the short-term.
The Nifty remains far above its own 200-Day Moving Average so the long-term trend is still bullish. It's likely that any trend that is set up in December will persist through early 2013. Volumes remain reasonable but on the lower side making allowances for settlement.
The FII attitude continues to be net positive and DIIs remain net sellers. The USD lost ground on Tuesday on FII inflows. Given the Greek bailout, it's possible that the Euro will see some gains. The rupee could possibly harden against USD, and fall against the Euro in the next three-five sessions. December is often a volatile month as FIIs window-dress ahead of their financial year-endings and the so-called US fiscal cliff remains to be tackled. The USDINR could swing anywhere between Rs 53.5 to Rs 56.50. The Bank Nifty jumped on Tuesday and it could test the 11,750-11,800 levels if the uptrend continues. The key support is between 11,450-11,500. The overall market direction could be heavily influenced by the high-beta Bank Nifty.
Traders should remain braced for a big move in December. Due to expiry effects, the current option put-call ratios are not likely to be good indicators. The December option chains suggest traders are expecting a swing of anywhere between 5,200 and 6,000.
The December call chain has high open interest between 5,600c (195), 5,700c (121), 5,800c (67), 5,900c (32) and 6,000c (15) with the OI peak at 5,800c. The put chain has high OI from 5,200p (3), 5,300p (4), 5,400p (9) , 5,500p (15), 5,600p (28), 5,700p (53) and 5,800p (96) with the peak at 5,500p. Since the underlying index is at 5,720, positions aren't quite zero-delta. The premiums are heavily skewed in favour of calls. The very short-term expectations of the next three sessions would be between 5,600-5,850.
Near-the-money return to risk ratios are better for bearspreads, while being okay for bullspreads. The bullspread of long Dec 5,800c (67) and short 5,900c (32) costs 35 and pays a maximum 65. The bearspread of long Dec 5,700p (53) and short 5,600p (28) costs 25 and pays a maximum 75. The bearspread is much closer to money. A strangle combination could also be created with long 5,600p, long 5,800c, short 5,500p and short 5,900c. This costs 48 and pays a maximum 52 with breakevens at 5,552, 5,848.