The market made an upside breakout in the Diwali week. If the uptrend continues past Nifty’s 5,500 level and sustains above this, we have hopes of a long-term trend reversal. The 200-day moving averages (DMAs) lie in the 5,450-5,000 zone and pulling above the 200 DMA would be positive. The institutional attitude was net-positive in the last five sessions. Selling by domestic institutional investors (DIIs) was outweighed by buying of foreign institutional investors (FIIs). As a result, the rupee has recovered to the 48-49.5 band against the dollar.
The index has managed a breakout above 5,200 and the zone between 5,150-5,225 should act as a support on short-term pullbacks. The intermediate trend would be considered positive, with a pattern of higher lows and highs evolving.
The truncated trading of the previous week, however means we can’t be totally confident of the sustainability of this trend. The daily high-low swings should continue to be 100-125 points and we can expect the index to continue opening with either high or low gaps of 30-50 points.
The CNXIT is above 6,200 and has key support at 6,150-6,200. The Bank Nifty is above support at 9,850 and testing resistance above 10,000. The strength in the financial index has been a key factor in pulling up the market.
In terms of news, the market is happy with the temporary resolution of the euro zone crisis and the situation in Libya. It has shrugged off the RBI policy rate rise and taken comfort from the freeing of savings rates and hints that the central bank may start easing off in future.
Consider three possibilities till November 7. A break below 5,150 could mean a slide till 4,900, and a failed breakout; a climb above 5,500 could mean recovery till 5,750 and range-trading, with the Nifty moving between 5,200-5,400.
The Nifty put-call ratio (PCR) remains bullish with PCR values above 1.5. Much of the call chain open interest (OI) is clustered at 5,400c (premium 81) and 5,500c (44). The biggest outstanding OI bulges in the put chain are at 4,900p (15) and 5,000p (23).
Consensus expectations are therefore, between 4,900-5,500 and breakouts in either direction beyond that zone, would cause a sharp move because unhedged traders will have to cover. With the spot Nifty at 5,326, the 5,300c (133) and 5,300p (89) can be considered on the money. The respective breakevens of 5,433, 5,236 roughly represent single-session expectations.
The close to money (CTM) bullspread of long 5,400c (81) and short 5,500c (44) costs 37 and pays a maximum 63. The CTM bearspread of long 5,300p (89) and short 5,200p (57) costs 32 and pays a maximum 68. These are fair risk-return ratios for spreads that seem very likely to be hit.
A long-short strangle combining long 5,500c (44), long 5,200p (57), short 5,600c (22), short 5,100p (36) costs 43 and pays a maximum 57. The breakevens are 5,157, 5,544. This will work if there's either an upside breakout or significant correction. There's a good chance of one of those possibilities. A smart trader may be able to squeeze profits from both ends of this position.
If you take the view that range trading will continue, look at put butterflies. The long 5,300p (89), two short 5,200p (2x57) and long 5,100p (36) costs a net 11. It offers profits if the market stays anywhere between 5,111-5,289 with a maximum return of 89 at 5,200.