5,448 level key test for Nifty

The market hit resistance above 5,375 after a three-session run-up. The short-term trend is indeterminate and we could see a small sell off in the next few sessions. Volume action is reasonable.

The key test of the intermediate trend will be the ability to test and beat the recent high of 5,448. If the index can climb above 5,448, we'd assume the intermediate trend remains positive. In that case, a breakout to 5,650-5,700 levels may be on the cards.

If the index cannot beat 5,448, the intermediate trend might reverse and the market could slide till the 5,175-5,220 level. The long-term trend would be tested if the market dropped below the 200-Day Moving Average (200-DMA), which is placed around 5,135-5,150.

These outcomes (a drop till 5,175 or a breakout above 5,450-plus) could occur within the September settlement or early into October. This week and the next will see key macro-economic numbers like the IIP and the Reserve Bank India's Busy Season credit policy, which could impact sentiment.

Intra-day volatility has reduced with very narrow ranges being traded in the past five sessions. This is reflected in a low VIX. The rupee has hardened versus both the dollar and the euro. The FIIs have remained net positive.

Among subsidiary sectors, the CNXIT has made a breakout till the 6,400 levels and this could be a positive driver. The Bank Nifty has come off a recent bottom at 9,950 but it remains muted and trading between 10,050 and 10,200 ahead of RBI policy. A rate cut could be a positive surprise and may trigger a serious upmove. Otherwise, if RBI does nothing, the Bank Nifty will probably test 9,950 again.

The Nifty's put-call ratio in terms of open interest (OI) is verging on the bearish. The September PCR is at 1.06. The September call series has high OI across the range of 5,300c (106), 5,400c (48), 5,500c (16) and 5,600c (5). The September put series has a similar range of liquidity with high OI visible between 5,000p (3.5), 5,100p (6.5), 5,200p (15), 5,300p (35) and 5,400p (75).

An interpretation of the OI distribution could be that some traders are prepared to stay hedged for a breakout but the bulk of the expectations is narrowly ranged. As mentioned above, this could be belied. The trading pattern is consistent with a 250 point swing in either direction.

The strangle of long 5,400c and long 5,300p is near-zero delta. It costs 83. The breakevens points of roughly 5,225 and 5,485 should not be exceeded in the next four sessions. The next big swing could come on next Monday if RBI surprises.

The trader can look for wide spreads. But the risk-reward ratios are good even close to money, thank to the recent narrow range-trading. The close to money bullspread of long September 5,400c and short 5,500c costs 32 and pays a maximum 68. The CTM bearspread of long September 5,300p and short 5,200p costs 20 and pays a maximum 80. The bearspread has a better risk:reward ratio and the two positions are practically zero-delta.

We could combine a slightly wider strangle of long 5,500c, and long 5,200p with a short 5,600c and a short 5,100p. This costs a net 20. Even an uncovered long 5,500c and long 5,200p costs just 32. The one-sided maximum payoff for the long-short strangle is 80.