Towards the end of a settlement, which saw a big surge, the market has been tight range-trading in the past few sessions. It's possible that settlement day will also see narrow movement. A mildly bearish session is likely if long traders book profits.
The long-term trend is clearly up and so is the intermediate trend. The short-term trend is indeterminate. Volumes have climbed in the past three weeks along with the indices as the Nifty and Sensex hit 52-week highs. The government appears reasonably stable and the FII attitude is positive.
On the upside, the level to beat in is Nifty 5,720, which is 52-week high. There's a lot of resistance between 5,675 and 5,725. By definition, a long-term bull market should see prices registering higher highs. Despite the surge in September, the market is reversing out of a long bearish phase and there could be enough pent up bullish fervour to sustain a move till the 5,900-6,000 levels.
On the downside, we should recall the upswing started with a breakout above resistance between 5,400 and 5,450. Any intermediate corrections should end above 5450. The last correction (September 20) found support at 5,525-5,550 and if the intermediate trend remains strong, this level should not be broken.
The subsidiary indices such as the Bank Nifty and CNXIT have backed the upmove and so have cyclicals, such as auto stocks, realty and metals. The rupee has strengthened a lot on the back of FII inflows and that could adversely impact the CNXIT.
The sentiment among FIIs and retail has clearly changed for the better. Domestic institutions have been net sellers in September. But they could jump into action if the RBI cuts policy rates. Nobody is expecting great corporate results in Q2, 2012-13 so any positive surprises could be met with strong buying while negative results may not impact the uptrend much. The real danger is political instability, either in India or abroad with US presidential elections around the corner.
Derivatives traders should be braced for a big move in October. A swing till either 5,450-5,500 or on the upside till 5,850-5,900 is quite likely. The Nifty's put-call ratio in terms of open interest is not so meaningful this close to settlement. For what it's worth, it is bullish at above 1.3. A rough estimate of swing estimates over the next five sessions would be between 5,550-5,800.
Looking at October Nifty options spreads, the near-the-money return to risk ratios are reasonable but a trader can afford to take wider spreads. A long October 5,700c (97) and short 5,800c (57) costs 40 and pays a maximum 60. A long 5,800c and short 5,900c (29) costs 28 and pays a maximum 72. Similarly, a CTM long October, 5,600p (59) and short 5,500p (35) costs 24 and pays a maximum 76. A long 5,500p and short 5,400p (19) costs a net 15 and pays a maximum 85. These positions are practically zero-delta since the Nifty is almost at 5,650. But the bearspreads are offering better return:risk ratios because most traders are bullish.
Strangles combining the long 5,500p, long 5,800c and short 5,400p and short 5,900c are not yet very attractive. The net cost is around 42 with breakevens at 5,458 and 5,842. The maximum return is 58.