The market dropped to a low of 4,789 on last Friday before it bounced back above 4,900. The support at Nifty 4,875 continued to hold on Monday. There is resistance above 4,950 and the 200-day moving average (DMA) at around 5,090 would also provide a secondary resistance.
As of now, the long-term and intermediate trends are down; the short-term is less easily defined. It’s possible the market will range-trade between 4,875 and 4,975 until settlement. But breakouts on either end could go till 4,790 or 5,090, without altering the nature of the bearish intermediate trend. Anywhere beyond 4,790 or 5,090 would lead to a review.
The area between 4,500 and 5,300 has been extensively traded over several years, so it’s difficult to set clear targets, given lots of congestion. However, if the market drops below 4,750, it could test the November 2011 lows of 4,550. On the upside, breakouts beyond 5,125 would certainly mean an intermediate trend reversal to bullish and it might mean a change in the long-term trend as well, since the Nifty would climb above the 200-DMA.
The institutional position remains mixed but low-key. Foreign institutional investors were net sellers last week, while domestic institutional investors were net buyers. Institutional volumes are low. The current action is being driven by retail. The dollar is testing resistance near new all-time highs, above the Rs 55 mark. The trend suggests a long USD/INR position could still be lucrative.
Among subsidiary sectors, the CNXIT may outperform the market in the next phase, due to the weak rupee. But it’s more likely to range-trade than to lead a big recovery. A fall below 5,700 could fall till around 5,300. A move above 5,900 may lead to a 6,100 target.
The Bank Nifty has seen a partial recovery on the basis of good State Bank of India results. It’s moving between 9,100 and 9,500 right now. A drop below 9,050 could lead to a fall till 8,800. A rise above 9,500 could lead to a 9,700 target.
Intra-day volatility has risen and trading through the next few sessions is more likely to be choppy than clearly trending. The news flow out of Europe and also the US will be very influential. Given expiry effects, option premiums one step away from money are temptingly low.
One way to calculate trader expectations is to look at breakevens on hedged positions. A straddle at the money of long 4,900c (68) and long 4,900p (76) is zero-delta. It has breakevens at 4,756 and 5,044. This is likely to be the range within which the market trades till settlement but a breakout beyond this would mean a 150-point move.
Hence, in the timeframe of the next five to nine sessions, until the settlement, traders should be braced for a swing of 4,600-5,200. Most probably, the market will trade within the narrower range of 4,750-5,050 given above, but a breakout is possible.
A bearspread of long 4,800p (39) and short 4,700p (18) costs 21 and pays a maximum of 79. A bullspread of long 5,000c (29) and short 5,100c (10) costs 19 and pays a maximum 81. If these two spreads are combined, we get a long-short strangle combination. The cost is 40 and the maximum payoff is 60 with breakevens at 4,760, 5,040.