Fall below 7,960 will indicate bearish pattern
The index has meandered between 8,150-8,450. It would be hard to discern a directional trend until there is a move that pulls outside that zone
Devangshu Datta
January 5, 2015 Last Updated at 20:04 IST
Volumes are still thin after the New Year. FII allocations toEmerging Markets in 2015 and to India in particular may not have been determined yet. The Nifty has meandered within a trading range since the US Fed Reserve concluded its Policy Meet in December.
The superstitious will note that the Nifty fell 666 points from its all-time high of 8,627 to a low of 7,961 on Dec 17. It bounced back above 8,200 and it has since maintained values of above 8,150. On the upside, there has been profit-booking above 8,450.
So, the index has meandered between 8,150-8,450. It would be difficult to discern a serious directional trend until there is a move that pulls outside that zone. The Nifty moved very quickly from 7,900 to 8,600 and then the December correction retraced that entire 700-point zone.
Thus, there has been a fair amount of trading. The next bounce must beat 8,627 to register higher tops and confirm that the bull market remains in force. On the downside, a fall below 7,960 would be significant in setting up a bearish pattern of lower lows. Short-term traders may assume congestion at every 50-pt interval.
Given the Fed's policy statement, traders expect the RBI to cut rates more or less immediately after the Budget, and that will be long before the Fed hikes USD rates. The Bank Nifty and other financial stocks have moved up sharply to a succession of new highs on the hopes of rate cuts and also assurances of less political interference for PSU banks from the PM. This could drive the overall market up, given the high weight (and high-beta nature) of the financial sector. But the rupee remains under pressure versus USD and rate cuts could also lead to the rupee sliding.
The FII attitude will be crucial to market direction and to USD-INR rates as well. In December, FIIs started buying Indian debt in quantity, which indicates expectations of rate cuts. If they push sufficiently large investments into India, that could also counter-balance rupee weakness. Otherwise, a long USD-short INR stance may be worth taking.
The Bank Nifty has hit new alltime highs, rising above 19,100. This uptrend may be worth trading with a long futures position. Short-term traders should assume support/ resistance zones at 150-point intervals on the BankNifty. The futures closed Monday at 19140 with spot at 19017. A short strangle of short 18500p (152) and a short 19500c (216) fetches a net inflow of 368 in premium. This would lose money only if the BankNifty moved outside 18132, 19868. It may be worth holding for 3-5 sessions in the hopes of premium decay.
The Nifty Call chain has open interest peaking in the range between 8400c-9000c. The Put OI peaks between 7800p-8400p. The put-call ratio is quite healthy at about 1.2 for both January, and also for the 3-month range.
The spot Nifty closed on Monday at 8378, with the futures at 8,424. The close-to-money bearspread is tempting for January with a long 8,300p (62) and a short 8,200p (39) costing 23 and offering a maximum return of 77. The CTM bullspread is much closer to money and not attractive with long 8,400c (119) and short 8,500c (71) costing 48 and paying maximum 52. Bulls should consider a wider long 8500c (71) and short 8,600c (38) costing 33 and paying a maximum 67. Even this has a less attractive risk:reward ratio than the CTM bearspread.
The asymmetric premiums indicate the optimism. A strangle combination of long 8,500c, long 8,300p, short 8,600c, short 8,200p, costs 55, and breaks even at 8,245, 8,555.
http://www.business-standard.com/article/markets/fall-below-7-960-will-indicate-bearish-pattern-115010500777_1.html
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