Nifty 9,675 is a critical support level

The sharp downtrend in the past five sessions has led to nervousness. The market moved above 10,175 to generate a new all time high on Tuesday September 19. It has now reacted to test support at 9,718, just before the settlement session. The support at 9,675-9,700 is critical. If that is broken, we will see a pattern of higher highs followed by lower lows. That could indicate a deep downtrend.
 
The projections on the new high indicated that 10,275 was possible. The failure to hit that projection followed by the breakdown below 9,975 implies that this could be a big downtrend. However, if the 9,675 support holds, we will see another phase of range-trading between 9,675 and 9,975.
 
Trend following systems suggest going short, with a trailing stop-loss at 9,900. The background signals are bearish. The VIX has spiked along with the falling price line. The Advance Decline ratio is quite negative. Selling volumes have been high, indicating that supply is increasing. Although domestic institutions are net buyers, the FPIs segment have indulged in heavy selling. So has retail.
 
By definition, the long-term trend remains positive given a record new high last week. The 200-Day Moving Average (200-DMA) is around 9150, way below the current mark. Taking a longer-term view, the Nifty moved North in late December 2016, from 7,900 levels to a high of 10,178 in September before it reversed. Fibonacci calculations suggest that the index could hit 9,300-9,350 in a serious correction.
 
The Nifty Bank had reacted down from an all time high at 25,200 in early August to 23,822 on August 10, before pulling above 25,000 again on the latest move. But, the financial index failed to hit a new high on the September upmove. It has now tested support at 23,700-23,800.
 
The financial index is currently held at just above 23,800. Four big trending sessions could push "Bank" till 25,000, or till 22,500. A strangle of long October 26, 25,000c (46), long October 26, long 22,500p (77) costs around 125. This can be offset with a short October 5, 24,500c (25), short 23,000p (40). This is not a calendar spread since the strikes are different. But, the short positions will reduce total outlay to around 60. The long premium should rise if short strikes are hit.
 
The Nifty's Put-Call Ratio is not useful close to settlement. But it is bearish. The October Nifty call chain has peak open interest (OI) at 10,000c, and high OI until 11,000c. The October put chain has very high OI between 9,500p and 9,700p, with high OI down till 9,000p.
 
The Nifty closed at 9,735 on Wednesday. Option traders should consider the near-the-money strangle of October 9,700p (109), October 9,800c (121), which costs about 230, with breakevens at about 10,030, 9,470. This is not zero-delta - the put is closer to money. Despite that, the higher call premium indicates the latent bullish sentiment.
 

A bullspread of long October ,9900c (75) short 10,000c (45) costs 30 and pays a maximum 70. This is about 165 points from money. A bearspread of long October 9,600p (80), short October 9,500p (58) costs 22, pays a maximum of 78 and is 135 points from money.
 
These spreads are nearly zero-delta and could be combined. The resulting position costs 148, with breakevens roughly at 10,050, 9,450. One side of this strangle set is likely to be hit in the October settlement and it could be taken.  
 
A trader who doesn't mind risk, could reverse and sell the short 9,600p, short 9,900c for just two-three sessions, followed by a buyback on September 30, or October 3 and taking the long 9,900c, long 9,600p, short 9,500p, short 10,000c for the rest of the settlement. Premiums usually fall immediately after settlement.