A fall below 5,565 could take Nifty to 5,477

It's difficult to call a short-term trend in a market that's see-sawing so much. Obviously daily news-flow could tilt things either way

Strong US employment data had the expected effect. Emerging markets fell on Monday on fears of the US Federal Reserve tapering it monetary expansion as early as September. Problems in the Chinese banking system and fears that Egypt blowing up could lead to rising crude oil costs added to worries.

The rupee crashed to new lows as foreign institutional investors (FIIs) continued to be net sellers in rupee debt and equity. Traders pointed out that the differential between benchmark US Treasury yields (which are rising) and equivalent Indian government paper is now less than the cost of hedging the rupee. However, the Reserve Bank of India (RBI) is likely to push the rupee back up, at least temporarily.

The Nifty held at 5,775, the current support, and it saw some recovery to above the 5,800 level. But it is etching a pattern of lower tops and has slipped below the 200-Day Moving Average (DMA), suggesting a weak intermediate trend and calls the long-term trend into question. Below 5,575, there is support roughly every 25 points. But the next key support would be 5,565-5,585. If that is broken, the next stop could be 5,477, the 2013 low.

On the upside, a move past 5,905 would be required to break the pattern of lower tops. First, the Nifty would have to beat 200 DMA, which is around 5,830. Shorter-term MAs are offering mixed signals. The index has held above its 10 DMA (at 5,775), and the 10 DMA is above the 20 DMA (5761) but the 7 DMA is at 5,840. Short-term volatility is such that MA signals seem unreliable.

Other indices have done slightly better. The Bank Nifty has lost less ground and it found support at 11,175. The CNXIT has done well on rupee weakness. The Nifty Junior also lost less ground. This could mean the market will swing up again. The Nifty's Put-Call Ratios (PCRs) have also recovered and remain bullish. Both the three-month PCR and the one-month PCR are above 1.3.

It's difficult to call a short-term trend in a market see-sawing so much. Obviously, daily news flow could tilt things either way. All the signs suggest that intra-day volatility is likely to stay high. The July settlement is likely to be as volatile as June.

Option chains suggest there will be huge resistances at 6,000-plus because the call chain's open interest peaks there. However there is adequate liquidity until 6,200c. The call premiums run at 5,800c (110), 5,900c (61) , 6,000c (29), 6,100c (13) and 6,200c (5). The put chain peaks in terms of OI at 5,600p and there's liquidity down till 5,400p. The put premiums run at 5,800p (84), 5,700p (51), 5,600p (31), 5,500p (17) and 5,400p (9).

The index is close to 5,800. A straddle of long 5,800c and long 5,800p would cost 194, with breakevens at about 5,606 and 6,004. Be prepared for a swing of this much in the next five sessions.

A bullspread of long July 5,900c and short 6,000c costs 30 and pays a maximum 70. A bearspread of long July 5,700p and short 5,600p costs 20 and pays a maximum 80. The bullspread is a little closer to money.

Both these spreads could be struck if the market maintains its recent historic volatility. The combined long-short strangles with these positions has an adverse risk:reward ratio with a cost of 52 and maximum payoffs of 48. This is tempting simply because one could profit from both ends.