Short-term trend is negative

The market has seen a reaction over the past three sessions falling from a recent high of Nifty 5,345. On Monday, support in the 5,175-5,200 zone was tested. The 200-Day Moving Average is at about 5,100. So, the index will have to stay above that level to maintain a long-term uptrend.

Volume action was weak through the past few sessions, though heavier on the downtrends. Institutionally, foreign portfolio investors have been generally bullish, while domestic institutions and operators have sold.

The short-term trend is obviously negative. The intermediate trend is difficult to read. The index has registered higher highs last week but the breakdown could mean the intermediate trend has reversed in the past three sessions, after being bullish for about six weeks. As mentioned above, a fall below 5,090 or thereabouts would be a bearish signal for the long-term. On the upside, the level of 5,345 would need to be breached to register renewed bullishness. Intra-day volatility should increase along with volumes, if the current downtrend continues.

In the currency market, the rupee could harden further against the dollar and euro, provided foreign institutional investor (FII) attitude remains positive. However, any trader going short against USD-INR or EUR-INR should hold stops at around 55.75 and 68.75, respectively.

Among subsidiary sectors, the CNXIT has been hit hard. Poor results and guidance from Infy as well as a hardening rupee have pushed the IT index below 5,600. Almost every liquid IT stock looks worth a short position at the moment

The financial index, the Bank Nifty remains reasonably placed. It has support in the 10,400-10,500 zone. Hopes of rate cuts in the next credit policy are keeping it buoyant. However, the signs in terms of the latest WPI numbers and the Reserve Bank of India governor’s statements don’t make easing look likely.

The Nifty’s put-call ratio in terms of open interest (OI) has fallen considerably but it remains in reasonable territory at about 1.2. In the July call chain, the OI is clustered between 5,200c (58), 5,300c (21), 5,400c (5). The July put chain OI peaks at 5,000p (7) with plenty of volume at 5,100p (20), and 5,200p (52). The premiums clearly show an expiry effect.

In terms of the next ten sessions, traders expect any down moves to halt at around 5,000 with a possible bounce till the 5,400 level. Given the chance of intra-day volatility increasing, the expiry effect could set up some very attractive spreads close to money.

The on-the-money straddle of long 5,200c and long 5,200p costs 110, which could mean that moves beyond breakevens at 5,090, 5,310 are likely to surprise many traders. An on-the-money bullspread of long 5,200c and short 5,300c costs 37 and could pay a maximum 63. Similarly, an on-the-money bearspread of long 5,200p and short 5,100p costs 32 and could pay a maximum 68. These are both attractive risk-reward ratios.

A long straddle of long 5,200c, long 5,200p combined with a short strangle of short 5,100p, short 5,300c would have an adverse RR ratio with a cost of 69 and maximum one-sided payout of 31. However, breakevens are close to money at 5,131 and 5,269. A slightly further from money strangle of long 5,300c, long 5,100p, short 5,000p and short 5,400c, costs about 29 and pays a maximum of 72 with breakevens at 5,071, 5,329.