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Devangshu Datta: Key downside support level at 7,893

The Nifty gave one bullish signal as it recorded higher highs in the past week

Devangshu Datta 

Devangshu Datta

The stock market inched up through the first week of 2017. The market awaits Q3 earnings reports and it's also processing the Budget rumours and new US policy stances. Nobody is expecting strong Q3 numbers, given demonetisation, poor macro-data and low bank credit. But low expectations means that the market would view even minor improvements as bullish. The Nifty gave one bullish signal as it recorded higher highs in the past week. Early December saw intra-day Nifty highs in the 8,250-8,275 range. The last week has seen an intra-day high of 8,306. However the market has not been able to sustain those levels and traded down below the 200 Day Moving Average (now at around 8,275). On the downside, the 30-month low of 7,893 in late December would be the key support level. The market has ranged within the 8,150-8,300 bracket in the past few sessions. A breakout or breakdown in either direction could lead to a movement till either 8,000 or 8,450. Foreign Portfolio Investors (FPI) continued to be net sellers while domestic institutions continue to be net buyers. As earnings come in, the market will be increasingly focussed on stock-specific news. However, the early Budget adds an extra dimension along with GST-related news. On the global front, the rupee continues to struggle versus a rising dollar. If FPI selling continues, the rupee could collapse to historic lows — it has already breached Rs 68. Despite this, there has been no rally in export-oriented stocks, especially IT and Pharma, due to fears of US protectionism. Analysts have downgraded many sectors. But the future impact of demonetisation will be hard to map from Q3 trends, as the stock of cash will change. The Nifty Bank is trading in the 18,250-18,400 range.

A long Nifty Bank (January 25), 17500p (55), and long January 25, 19000c (46), costs 101. This is almost zero-delta with the index at 18286 (and about 40 futures premium). The breakevens are roughly at 17395, 19105. Either end of this long strangle could be hit with three big trending sessions. A calendar spread can be created by selling the position of short January 19, 17500p (17) and short January 19, 19000c (14). This cuts the cost of the January 25 long strangle to a net 70. If a short option is struck, the corresponding long options will rise in value. The VIX has fallen and flattened out. The put-call ratio is indicating some bullishness with ratios above the 1.1 level at both the 1-month and 3-month levels. Coupled to the tradition of a pre-Budget rally this could induce some traders to go bullish. The January Nifty call chain peaks at 8400c, with high open interest till 9000c. The January put chain has peak OI at 8000p, with high OI at 7800p, another bulge at 7500p, and good OI till 7000p. The Nifty is at 8236 with premium of 15-20. A bullspread with long Jan 8300c (66), short 8400c (32) costs 34 and pays a maximum 66. This is 64 points from money. A bearspread with long Jan 8200p (72), short 8100p (44) costs 28 and pays a maximum 72. This is just 36 points from money. The bearspread has a better risk:reward ratio and it's also closer to money, which indicates current optimism. These positions could be combined for a long-short strangle set, which is not zero-delta. The net cost is 62 with maximum gain of 38 and breakevens at 8138, 8362. This has a poor risk: reward ratio but it also has a very good chance of being hit, given a breakout or breakdown by Jan 25.

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First Published: Mon, January 09 2017. 23:24 IST
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