Current volatility looks unsustainable in medium term

The market continued range-trading through settlement. Carryover was good, but volumes dipped in both cash and derivatives immediately after settlement. On Monday, the index promised an upside breakout, but the move petered out. The trading range has seen support constant at 5,350 and strong resistance above 5,450. Volatility has stayed low and the Vix has dropped. Market direction is impossible to predict until there is a valid breakout. As and when a breakout occurs, the next move will be till a minimum target of 5,275 or 5,550. The odds on such a breakout happening soon are getting lower. The current volatility looks unsustainable in the medium term when compared to historical volatility.

The institutional attitude remains consistent with foreign institutional investors (FIIs) being steady but moderate net buyers, and domestic institutions being steady net sellers. Sooner or later, the attitudes will align and volumes will expand. That will determine the next significant move, but we don’t know the direction.

It’s week 11 of an intermediate uptrend. Maturity of the trend and a reversal within two weeks would be expected and one would be surprised if there isn’t a noticeable correction within this settlement. Intermediate trends rarely sustain beyond 12 weeks and that, too, only near a bull-market peak or bear-market bottom. The current trading shows little signs of such a top/bottom. Simple on time calculations, a downside breakout seems more likely and if that comes, it should be the start of an intermediate correction. The background signals are neutral or mildly bullish. Breadth is nearly balanced with advances slightly ahead of declines in couple of sessions. Among the subsidiary indices, the BankNifty (10,411) has just hit a new high and it could continue to be bullish with a potential target of 10,650-10,700. The CNXIT (6,104) is closer to neutral with support at 6,000 and a possible target of 6,250.

The Nifty option scenario seems mildly bullish. The put-call ratio is comfortable. But the option chain suggests there will be major resistance above 5,600 and major support at 5,200. Traders with a five-session perspective should be prepared for moves till these zones.

August spreads close to money have good risk:reward ratios. The long Aug 5,500c (52.5 premium) and short 5,600c (21) costs 31.5 and pays a maximum of 68.5. The long Aug 5,400p (74.5) and short 5,200p (47) costs a net 27.5 and offers a big maximum return of 72.5. If the trader is willing to wait till settlement in the hopes of a breakout,. strangle combinations offer good risk:reward ratios. A long August 5,600c (21) and long Aug 5,300p (47) costing 68 can be laid off with a short 5,200p (29) and a short 5,700c (7). The net cost is 32 with breakevens at 5,268, 5,632 and a maximum return of 68.