Markets may break key levels in next settlement

Last Updated: Thu, Oct 25, 2012 04:46 hrs

Three weeks of range trading have led to low premiums and expectations that the market will not move much on settlement day. Short-term support for the Nifty is between 5,625 and 5,675, with short-term resistance at 5,700-5,725 and further resistance till the 52-week high of 5,815. Traders focused on settlement are expecting the market to stay within 5,650-5,750.

The November settlement could see breakouts beyond 5,815, or breakdowns below 5,625. Either move could result in a swing of 200 points, till 5,425 or 6,000. The long-term trend is bullish, with the Nifty well above the 200-day moving average. A fall below 5,610 would indicate a bearish intermediate trend. Volumes are reasonable. The attitude of foreign institutional investors (FIIs) is positive and domestic institutional investors (DIIs) are net sellers. The USD has bounced above 53 and it could push up till 54.50 if the market trend weakens and FII attitude turns bearish.

The Q2 results have produced both positive and negative surprises, so far. Moves have been stock-specific. The overall corporate performance will be clearer in another 10-15 days. Sector indices like the Bank Nifty and CNXIT have looked more volatile than the Nifty. The CNXIT was hit by Infy's results but recovered on excellent results from TCS and HCL Tech.

The Bank Nifty has key support at 11,200-11,300. This could be tested and broken if the credit policy is harsh. Traders expect a cash reserve ratio (CRR) cut, with policy rates unchanged. If this comes to pass, the Bank Nifty will stay above 11,300. If policy rates are hiked, and/or CRR isn't cut, the financial index could drop below 11,200 and perhaps, below 11,000.

Domestic political tensions could have a bearish effect, regardless of Reserve Bank of India (RBI) policy. The US presidential elections could also have an effect. The market will rise if Romney wins, or even if a Romney victory is expected.

Derivatives traders should be braced for a big move in November – at least a 200-300 points swing. Put/call ratios (PCRs) are unreliable indicators near settlement but the Nifty PCR stands at a mildly bullish 1.1 (overall in terms of open interest).

Option chain analysis suggests traders are looking at range-trading between 5,650-5,750 or even narrower ranges during settlement. The zero-delta straddle of long October 5,700c (20) and long October 5,700p (24) breakevens at 5,656 or 5,744. The 5,800c (1) and the 5,600p (2) are cheap – a 100-points swing on settlement day would strike either option.

In the November Nifty spreads, near-the-money return to risk ratios look reasonable. A trader with a 10-session perspective can take wider spreads. The at-the-money bullspread of long November 5,700c (115) and short 5,800c (67) costs 48 and pays a maximum 52. The at-the-money bearspread of long November 5,700p (82) and short 5,600p (48) costs 34 and pays maximum 66. The straddle at 5,700 would cost 197, implying consensus that the Nifty will stay inside the breakevens of 5,500 and 5,900.

A wider bullspread of long 5,800c (67) and short 5,900c (35) costs 32. A wider bearspread of long 5,600p (48) and short 5,500p (28) costs 20. The bearspread at the money looks attractive while a bullish trader should move further off the money with a long 5,800c-short 5,900c. A strangle of long 5,800c, long 5,600p, combined with a short strangle of long 5,500p, short 5,900c costs 61 and pays only 39. So, it's not attractive.

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