Breakouts from the 4,789-5,125 range will decide direction

The market stayed range- bound through the last few sessions of the May settlement. The support above Nifty 4,900 held but there was also strong resistance above 5,025. Volumes stayed low and institutional involvement was minimal. The impression is that the market is waiting for global or domestic news-based triggers. Given the low-key institutional involvement, we'll probably have to wait for news- based triggers before the volume situation improves.

As of now, the short-term and intermediate trends are difficult to read. The long-term trend is negative. The key levels to watch are 4,789 on the downside and 5,125 on the upside. Breakouts beyond those points would define the intermediate and long-term trends.

In the short term, traders can assume that there will be resistance/support levels shifting at every 50 points or so and trends have not held for more than one or two sessions in succession. It's probably better to wait for a full scale breakout, rather than to trade for small gains in a choppy period.

If the market does breakout from between 4,790 and 5,125, it will have a projected target of 250-300 points. The last intermediate trend peaked at 5,125, while the key indicator of the 200-day moving average (DMA) is around 5,075-5,100. An upside breakout above 5,125 would also lead to a review of the long-term trend, while a downside move would probably test the 2011 lows around 4,550.

The dollar has made a succession of higher highs and the trend remains alive. A long dollar-rupee position could still be lucrative but stop-losses should be tight. Also, look out for a potential short euro-rupee, since the euro could collapse suddenly.

Among subsidiary sectors, the CNXIT is outperforming slightly, due to the weak rupee. As of now, the upside would be capped by resistance at 6,100-6,200, while there’s support at 5,750-5,800. The Bank Nifty has managed to push above 9,500 and this has been a major factor in keeping the broader market afloat. If support at 9,400 breaks, the financial index may slide back till round the 9,100-9,200 level. On the upside, it could test resistance between 9,700 and 9,900.

Calculating possible support/resistance by examining open interest on the option chain is likely to be very inaccurate close to settlement. Overall, the put-call ratio is slightly above the danger mark but the May put-call ratio is bearish. This could mean the market will see bearishness in the settlement, without breaking below the 4,790 level.

Given the likelihood of small range-bound movements in the immediate future, traders should probably wait for the settlement to finish and then seek hedged positions that could profit on a breakout.

At current prices a June bearspread of long 4,800p (80) and short 4,700p (57) costs 23 and pays a maximum of 77. A bullspread of long June 5,100c (52) and short 5,200c (26) costs 26 and pays a maximum 74. With the market poised at 4,950, these spreads are equidistant from money and the return:risk ratios are attractive.

A combination of these two spreads would be a zero-delta, long-short strangle combination. The cost is 49 and the maximum payoff is 51. Traders hoping for a big breakout in June could move away and hold the long 5,200c (26), long 4,700p (57), short 4,600p (40) and short 5,300c (12). This costs 31 and pays a maximum 69 with breakevens at 4,669, 5,231.