'This looks like a long-term bear market and there could be mounting losses in the near-term,' says Devangshu Datta.
The market looks bearish with the Nifty holding at support at 8,000 mark after sliding once till 7,900 and bouncing there.
Demonetisation added to the woes for India, with foreign institutional investors pulling out of every emerging market. Domestic institutions are net buyers.
The dollar hardened with high dollar bond yields and consensus that the US Federal Reserve will raise rates.
The Reserve Bank of India is almost guaranteed to cut policy rates in December. If the differential between the US Fed Fund rate and Indian Repo rates narrows, the dollar could gain even more.
In hawala channels, the dollar was trading at a huge premium as black-money-holders disposed of Rs 500/1,000 notes.
The Nifty bounced from support at 7,915 on Monday November 21. It is clinging to support near 8,000.
The index is likely to drop again post-settlement. It has emitted several bearish signals starting with the basic pattern of lower lows and lower highs.
It is trading below the 200-Day Moving Average (200-DMA) which is around 8,140.
It is also below its own 7-DMA and 20-DMA, which indicates a bearish short-term trend. The crash was on high volumes. The VIX is very high as well.
In technical terms this looks like a long-term bear market and there could be mounting losses in the near-term.
In addition, corporate results have been poor and that is the prognosis for the second half, at the least.
Cash in the system will not be replenished for several months. Exporters have been hit too.
If the index slides below 7,900, it could drop till 7,500-7,600 and it looks more likely to head South, with occasional rallies on short-covering.
On the upside, the index must move above the 200-DMA (say, 8,150) and stay above it for a first positive signal.
A rise above 8,400 would suggest a quick recovery may be possible.
The Nifty Bank has seen wild swings. As of now, the Nifty Bank is around 18,500. A long Nifty Bank call of 19,500c (148) for December 29, and a long December 29, 17,500p (142) costs 290.
Either end of this long strangle could be struck, given three big trending sessions in the next month.
Traders could sell the December 1, 18,000p (54) and the December 1, 19,000c (60). This cuts the cost of the long strangle by 114, reducing it to176.
If the short strangle is struck in the next six sessions, the long strangle will rise in value to compensate.
Put-call ratios are not useful so close to settlement. The market looks a little oversold, but it has already bounced twice.
There could be fresh selling as settlement ends. The December Nifty call chain has good open interest (OI) till 9,000c with peaks at 8,000c, 8,500c and 9,000c.
The December put chain has a big peak of OI at 8,000p, with another bulge in OI at 7,500p and good OI till 7,000p.
The Nifty is at 8,033. A bullspread with long December 8,200c (94), short 8,300c (60) costs 34 and pays a maximum 66. This position is 170 points from money.
A bearspread with long December 7,900p (102), short 7,800p (77) costs 25 and pays a maximum 75. This is 130 points from money and it also has a better risk:return ratio.
A wide strangle of 7,800p (77), 8,200c (94) is not zero-delta. The total premium is 171. The put is 230 points from the money while the call is 170.
One end is likely to be hit in the December settlement, but not in the next two sessions.
You could sell this position for two sessions and reverse on Monday, when premiums should have fallen overall.
