Expect breakout till 5,500

The short-term trend is down and we may be on the verge of a downside breakout. Closing values on April 18 (Nifty 5,729) hit the simple 200 Day Moving Average and a drop till 5,600-5,625 (the exponential 200 DMA zone) looks on the cards. If the 5,600 support breaks, 5,500 would be a target.

If the 5,700 support holds, range-trading could occur with a bounce till the 5,900-5,950 zone. However, there is a pattern of falling tops between 5,900 and 5,950 and that implies a negative intermediate trend. Volumes have dropped. The institutional attitude is mixed. But FII are selling more than the DII buying can absorb.

We can, therefore, define three trading possibilities in the last two weeks of settlement. There could be a breakout till 5,500 or lower, which seems most likely. There could be range-trading between 5,600 and 5,950. There could be a rise past 5,950 (least likely in the given timeframe). A drop below 5,600 would confirm the bearish long-term trend and then, we’d expect the 2,011 low of 5,177 to be tested, sooner or later.

The Nifty option open interest position is negative for April at 0.97. It’s at 1.2 overall, which is neutral or bullish. The low April PCR suggests that a further drop is very likely in the next few sessions. Trend-following technical systems are mostly in sell mode. Intra-day volatility is likely to rise further. The trader should be prepared for 150-point swing sessions.

The April call chain has a huge OI bulge at 6,000c (premium 10), with smaller bulges at 5,800c (46) and 5,900c (21). The April put chain has a massive OI peak at 5,700 (60) and high OI at 5,600p (30) down till 5,500p (14). The 5,700p breakeven is at 5,640 – in the middle of the DMA support zone. Consensus trader-expectation is around 5650-6010. The OI position implies that, if the 5,650 support is broken, there could be a rapid decline of another 200 points.

Weakness in the CNXIT, and to a lesser extent in BankNifty, have driven the Nifty down. The BankNifty is now testing support between 11,500 and 11,600 and if 11,500 is broken, it could drop till 11,100. The CNXIT is testing support between 6,600 and 6,700 and a drop below 6,550 could mean a move till 6,250.

Given the three trader perspectives defined above, we also need to note the expiry effect. Preferably, stay close to money. A long April 5,800c (46) and short 5,900c (21) costs 25 and pays a maximum 75. A long April 5,700p (60) and a short 5,600p (30) costs 30 and pays a maximum 70. The bearspread is closer to money.

We could combine the above bullspread and bearspread to create a long-short strangle position close to money, with a net cost of 55, breakevens at 5,645; 5,855 and potential returns of 45. This is tempting since both sides may be struck. Moving the bearspread a little further away, a long 5,600p (30) and long 5,800c (46) can be combined with a short 5,500p (14) and a short 5,900c (21). The net cost is 41. Breakevens are at 5,559, 5,841 and the maximum one-way return is 59.