The market finally made a breakdown in the past couple of sessions. Despite a recovery, the trend can now be assumed to be down. Support at the 200-day moving average (DMA) was broken on Friday, and the recovery ran into resistance at the 200-DMA.
The key level on the downside is now Nifty 4,988, the low registered on Monday May 7. The recovery hit resistance at 5,125, which is very close to where the 200-DMA is situated. A pullback past this level would hit resistance between 5,175 and 5,200.
The breakdown from the trading range of 5,135-5,380 should set up a target of 4,850-4,900. It confirms the long-term trend is down, due to the breach of the 200-DMA. It also confirms the intermediate trend is down. The short-term trend could see some sort of support holding out between 5,075 and 5,200.
There's been a small recovery in foreign institutional investor (FII) buying in the past two-three sessions on the deferment of GAAR. However, domestic institutions remain heavy sellers. The dollar-rupee has seen a little support come in. But the currency trend suggests the rupee is going to weaken further, and a long dollar-rupee with a stop-loss at 52.5-52.65 may be tempting.
There's strong resistance at current levels (5,125) and another band of resistance between 5,175 and 5,200. If there's a lot of buying and a relief rally, the next resistance would be 5,280-5,300.
On the downside, as stated above, a drop till 4,850-4,900 is likely.
Among subsidiary sectors, both the CNXIT and the Bank Nifty look bearish despite partial recoveries. The CNXIT could drop back to test support at 5,650-5,750. However, a weak rupee may provide some support.
The Bank Nifty is high-beta and it's dropped to test support at 9,400-9,500 before making a recovery. It's likely to test those levels again and a fall till 9,000 is likely if 9,400 breaks. The Bank Nifty could also lead a possible market recovery if it bounces above 10,200.
Intra-day volatility is likely to rise considerably now that the trend has seen a breakout.
The Nifty put call ratio (PCR) is bearish. Overall, it's about 1.1 and the May PCR is 0.97. Option chain analysis suggests a massive build up in put open interest (OI) at around 5,000p (54). That should provide some support between 4,950and 5,000.
Call open interest peaks at 5,200c (64) and 5,300c (34). There is however, a fair amount of OI down till 4,800p and up till 5,400c. The majority of traders would be expecting moves between 4,900 and 5,300 with some braced for moves till either 4,800 or 5,400.
A straddle at the money of long 5,100c (112) and long 5,100p (90) provides a reasonable idea of consensus expectations. Breakevens would be roughly at 4,900 and 5,300. Moving slightly away from the money, the bullspread of long 5,200c and short 5,300c costs 30 and offers a maximum return of 70. A bearspread of long 5,000p (54) and short 4,900p (32) costs 22 and offers a return of 78. Both these spreads offer decent risk-reward ratios.
A trader could combine the long 5,000p, long 5,200c, and short 4,900p and short 5,300c to create a long-short strangle position. This has a slightly adverse ratio, costing an initial 53 and paying a maximum 47. But both sides of the position could be hit.