Downtrend could last for 1-4 weeks

The market is in an intermediate downtrend, but it could mark time through the settlement session. We’ve seen declining tops, but support at 5,975 has held after being tested thrice. On the upside, there’s strong resistance in the 6,075-6,150 range.

Volumes are high in cash and derivatives. But breadth signals are poor, with declines outnumbering advances and thin trading in smaller stocks. The FIIs are net buyers but in very small quantities. The domestic institutions remain steady net sellers and retail players are selling more.

Post-settlement, we could expect further net losses. The downtrend started in mid-October and lasted approximately two weeks. It could run for another one-four weeks, given the 18-week uptrend that preceded it.

A correction till 5,700-5,750 is possible if 5,970 is broken, though there is support at roughly 50-point intervals on the downside. A worst case scenario would be a correction down to 5,550. Even a big rebound on short-covering should end below 6,200. However, moves above 6,150 would suggest the downtrend is easing or ending.

The CNXIT and Bank Nifty have outperformed the Nifty through the past 19 months. The Bank Nifty is under pressure and worth a short. It could easily slip below the 12,000 mark. The CNXIT should also take net losses and support between 6,350 and 6,400 may be tested in the next few weeks.

The Nifty’s put-call ratio remains in a normal-bullish range. However, VIX has risen. If we discount expiry effects, close to money premiums are high. There is a fair chance of net losses through much of the November settlement and a lot depends on collective FII attitude.

The Nifty closed at 6,013. Examination of on-the-money October 6,000c (47) and 6,000p (14) and November 6,000c (170) and November 6,000p (107) reveals a couple of things. First, that bullish expectations are higher. This is a danger signal with net cash sales and without institutional support. Second, settlement day expectations breakeven at 5,986 and 6,047, which is very underpriced and tight. Any signs of weakness will see the 6,000p spike in particular.

With further from money spreads, a long November 6,100c (117) and short 6,200c (76) bullspread costs 41 and offers a maximum return of 59. A long November 5,900p (73) and short 5,800p (49) costs a net 24 and pays a maximum of 76. The bearspread is more attractive.

One way to improve potential long-side returns is to short the October 6,100c (7) and take a November bullspread. If the 6,100 level is struck, the November long call will also rise in value. Otherwise if the October 6,100 expires worthless, the November bullspread cost drops to 34.

In the November settlement, a trader may take a wider set of long-short strangles. A long November 6,200c and long November 5,800p combined to a short 5,600p (21) and short 6,400c (25) could cost a net 78 with a potential maximum one-way payoff of 122.