5,700 key level on the upside

The Nifty has gyrated sharply in the last 10 sessions. It bounced from a low of 5,197 to a recent high of 5,609. Volumes and volatility have risen, helped along by settlement considerations. The FIIs have pumped in Rs 2,700 crore in net buying in the past 10 sessions, more than compensating for Rs 375 crore of net sales from domestic institutions. A key level to watch is 5,700 on the upside.

If that is broken, there may be an intermediate uptrend testing higher levels. If the resistance at 5,700 holds, the market could range-trade 5,450-5,650, as it did earlier in June. If the 5,450 support does break, we should see 5,200 tested. Through this extended range of 5,200-5,700, there are congestions at 50 point intervals, acting as supports  and resistances.

The CNXIT is range trading between 6,500-6,600 and if it moves up beyond 6,650, it could test 6,900-7,000 within 10 sessions. The Bank Nifty has lifted above 11,000 and it is testing resistance above 11,150.  If it moves outside 10,850-11,200, it could swing till 10,450 or 11,600 in 10 sessions. The Bank Nifty's future direction is likely to be a major influence on the broader market. The three trading possibilities are --- A breakdown below 5,450,  a rise above 5,700 and range-trading between 5,450-5,650. The Nifty put call ratio is quite bullish with the June Put/Call Ratio (PCR) at 1.6 while the overall PCR is 1.5. About 60 per cent of open interest is in June so, there could be heavy carryover in the option market today.

In the futures segment, the July Nifty is at 5,630, while June is at 5,608 and the spot at 5,600. The excess premium on July suggests carryover has already been healthy. Daily volatility is likely to stayup. We may see a couple of daily 150 point sessions in the next two weeks. The July call chain has the highest open interest (OI) clustered at 5,600c (128), with the 5,500c(187), 5,700c (78) and 5,800c (43) also well populated.  Beyond 5,800c, OI drops. The July put chain has OI spread more or less evenly across the 5,000p (7), 5,100p (11), 5,200p (17), 5,300p(26), 5,400p (43), 5,500p (67) and 5,600p (104). The July OI clustering suggests that traders are still nervous about a potential downside. Slightly distant from money July spreads offer good risk-reward ratios. A long July 5,700c and short 5,800c costs 35 and pays a maximum of 65.

A long July 5,500p and short 5,400p costs 24 and pays a maximum of 76.  The bearspreads are better. Both these spreads look better than on-the-money spreads in terms of risk-reward and the new settlement offers ample time for a swing.

On similar logic, we could look for distant long-short strangle combinations. A long 5,400p and long 5,800c can be combined with a short 5,900c (22) and a short 5,300p. The net cost is 38. Breakevens are at 5,362, 5,838. Strictly for tomorrow's session, a trader could try a long straddle with long June 5,600c (27) and long June 5,600p (22). The idea is that, as the market moves, the option that goes into the money will gain more than the other option will lose.