Brace for downsides till 5,200; upsides till 5,600

The market appears to be in correction mode. It has slid from 5,549 (August 23) to lows of 5,390. There is a very good chance that the September settlement will see further net losses. In the short term, there is clearly defined support between 5,375 and 5,400 and strong resistance above 5,470.

As an when the 5,375 support is broken, the market will slide to 5,275, and it may fall further. Fibonacci retracement calculations suggest the downturn could last four-eight weeks and it should bottom out either at 5,100 or 5,225.

There are supports at roughly 50-point intervals. The downtrend is not absolutely confirmed, though we’ve seen a falling pattern. A dip below 5,350 would be confirmation of correction. Declines are also outrunning advances.

The institutional position is interesting. Foreign institutional investors (FIIs) sold last week, while domestic institutional investors (DIIs) bought.

On Monday, FIIs were moderate buyers. If the institutions do align as buyers, the downtrend will be neutralised and the Nifty will stabilise above 5,350.

If the institutional attitude turns totally negative, it will accelerate the downtrend and increase its magnitude.

Corrections have already occurred in both the BankNifty and CNXIT. Further corrections appear to be likely. The Nifty rarely rises except when these two sectors are delivering net gains. The BankNifty, in particular, appears to be weak and worth a short position.

Volumes are reasonable and carryover and reopening of positions in September appears reasonable. Volatility is also up and the Vix has risen significantly. But the option chain doesn’t show obvious bearishness.

The Nifty put-call ratio is in the normal, bullish range. Open interest (OI) in September options (which constitute 65 per cent of total Nifty OI) have a put-call ratio (PCR) of 1.6, while the overall PCR (in terms of OI) is around 1.4.

However, expectancies are reflected in skewed premium pricing. Far from money, there’s a quicker deterioration in call premiums, while put premiums are relatively expensive at same distances.

Traders should be braced for downsides until around 5,200 and upsides till about 5,600 in the next five sessions.

The index is at around 5,415, which means that the 5,400 put (premium 97) and 5,400 call (118) are on-the-money. The September bearspread with long 5,400p (97) and short 5,300p (68) costs 29 and pays a maximum of 71. The September bullspread with long 5,500c (64) and short 5,600c (25) costs 38 and pays a maximum of 62.

Obviously the bearspread, which is much nearer the money, has a better risk-return ratio.

With the time-frame of the settlement in mind, a long-short strangle combination is possible. A long 5,600c (26) and long 5,200p (45) can be offset by a short 5,000p (19) and short 5,800c (4).

This costs 48 and it has breakevens at 5,152 and 5,648. It could have a big pay off if the market sees a major move.