External Events Might Decide if Uptrend Will Continue-Derivative Strategies

Most foreign brokerages expect Sensex to touch 33,000 before December

DEVANGSHU DATTA

A surprise rate cut enabled thestock market to break out of atrading range lasting severalweeks. Based purely on domes-tic signals from the Indian mar-kets, we could expect the bullrun to strengthen. At only 25basis points, the Reserve Bankoff Indias out-of-turn rate cutwas minimal but promised tostart a trend. Between now andthe Budget, sentiment aboutthe Indian economy is likely tobe positive.

The danger is external.Asian markets are nervousabout China and Europe iswaiting for a quantitative eas-ing expansion programmefrom the European CentralBank (ECB). If Chinas grossdomestic product numbers areworse than expected, or if theECB disappoints, some bear-ishness will be introduced.

The Nifty jumped past8,450 and kept going up; themain driver has been financialstocks, including banks andnon-banking financials. TheBank Nifty has moved up to asuccession of new all-timehighs. Given the high weightof bank stocks in the Nifty andthe high-correlation, high-betanature of the Bank Nifty, itsexpected the Nifty will alsobreak out to new all-time highsof more than 8,625.

In the past three sessions,the attitude of foreign institu-tional investors was positive,with net buying. While that ofdomestic institutionalinvestors has been negative(net selling). Volumes are mod-erate and the breadth is posi-tive, with advances outnum-bering declines.

The rupee has strength-ened against the dollar. It couldalso strengthen against theeuro if the ECB announcesquantitative easing. End-ofthe-month buying by oil-marketing public sector under-takings will lead to somepressure, with the rupee likelyto ease against the dollar.

For several weeks, the Niftymeandered within a tradingrange, moving in a 300-point

zone of 8,150-8,450. On a widertime frame, there has been alot of trading between 7,900and 8,600 in the past fourmonths.

The current breakoutshould mean a move past 8,627(the all-time high), confirmingthe big bull market is alive. TheBank Niftys movement andthe breakout suggest targets inthe region of 8,750 could be hit.Short-term traders mightassume congestion at every 50-point interval.

The Bank Nifty is obviouslyin a strong uptrend. As its innew territory, target setting isimpossible. Traders who takelong positions in either BankNifty futures or options shouldbe prepared for a reaction totrigger short-term pullbacks till

19,100. Stop-losses should beset accordingly.

Expiry effects will be evi-dent soon, as the Republic Daywill curtail the number of ses-sion till settlement. The Niftycall chain has open interest(OI) peaking at 8,700c, with aslightly smaller OI bulge at8,600c. There is ample OI till9,000c. The put OI is very highat every 100-point strikebetween 8,000p-8,500p. At 1.6,the put-call ratio is abnormallyhigh for January; it is 1.4 for athree-month range. This couldsignal a short-term correction.

On Monday, the spot Niftyclosed at 8,550, with the futuresat 8,578. The close to money(CTM) bearspread of long8,500p (62) and short 8,400p (38)is attractive, costing 24 and pay-ing up to 76. A wider bearspread,with long 8,400p (38) and short8,300p (24) could also be hit; thiscosts only 14. The CTM bull-spread of long 8,600c (73) andshort 8,700c (34) is acceptable,with a cost of 39. A wider spreadwith long 8,700c (34) and short8,800c (13) costs 21.

A strangle combination oflong 8,700c and long 8,400p;and short 8,800c and short8,300p, costs 35 and breakseven at 8365, 8735. Despite therelatively short time to settle-ment, there are high chancesthe wider spread will pay off ineither or both directions.

DERIVATIVES STRATEGIES

External events might decide ifthe uptrend will continue

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