The market swung violently on Monday, hitting a high of Nifty 5,190 before it corrected down to a low of 5,041. Volume was significant and the implications are bearish. The do-nothing credit policy disappointed, though the Greek elections were favourable.
The close was below the 200 daily moving average (DMA) and unless there's a sharp recovery, this confirms that the long-term trend is bearish. Liquidity and volumes have improved, however. The institutional attitude had been positive in the sessions leading up to Monday, but that session saw selling.
If the swing sets a new trend, the market will react down through the next few sessions. The key support is at 4,770 and one would hope that holds till settlement. On the upside, the market must now beat 5,190 to establish a new uptrend. There is congestion at every 50 points or so.
The currency market focus may have changed. Both the US dollar and the euro gained versus the rupee, but the euro gained more. A long USDINR remains a valid trade but a long EURINR looks to be even more lucrative in the next two or three sessions. Set a stop loss somewhere between 55-55.50-55.75 if you are long USDINR. A long EURINR should have a stop between 70.25-70.45.
Among subsidiary sectors, the CNXIT is likely to do slightly better than the overall market. The tech index may hold above support at 5,900. The financial index, the Bank Nifty, had a sharp breakdown from the 10,200 level to 9,750. it could fall till 9,450 in the next few sessions and a drop till 9,000 looks quite likely. Due to rate cut expectations being belied, the Bank Nifty now looks quite bearish. Since its high-beta and high weight versus Nifty, it could drive the overall market down. A short Bank Nifty position looks marked and, if necessary, this can be hedged by long Nifty calls.
The Nifty's put-call ratio in terms of open interest is quite high, at above 1.6 for the June series. This may not be sustainable. Open interest (OI) in the June call chain has a build-up from 5,000c (103), 5,100c (49), 5,200c (18) and 5,300c (5). There is a huge bulge at 5,200c. The put chain has a OI build-up from 4,600p (4) with a lot of OI at 4,700p (6), a peak at 4,800p (12), 4,900p (24) and a fair amount of OI at 5,000p (48).
The expiry effect is evident with most traders focussed on the range between 4,800-5,200. However, on the downside, there are some hedgers looking at a possible drop till 4,600. If there are big swings now, they're likely to be oriented south. Volatility is likely to rise. Another bearish session could also solidly establish a downtrend.
A bearspread of long June 5,000p (48) and short 4,900p (24) costs 24 and pays a maximum of 76. A bullspread of long June 5,100c (49) and short 5,200c (18) costs 31 and pays a maximum 69. These are both reasonable ratios for near-the money positions.
If you wish to hedge two-way moves, a long-short combination strangle can be created using the near-the-money spreads. A long 5,100c, long 5,000p, short 5,200c, short 4,900p costs a maximum of 55. It offers one-way maximum returns of 45, with breakevens at 4,945, 5,155.