Slide till 4,750 if support at 4,850-4,875 is broken

The market continued to trend lower. It found some support at 4,875 but resistance at the 200-day moving average (currently at about 5,120) confirmed the long-term trend is bearish. On the upside, we would have to look for a break beyond 5,125 to see a trend reversal. On the downside, a breach of support at 4,850-4,875 could mean a slide till 4,750 level. The range of 4,600-4,900 has been very extensively traded historically. Congestion exists at roughly 50-point intervals.

As of now, the trends are in phase with the long-term trend, the intermediate trend and the short-term trend all headed south. In a trending run like this, we'll have to wait for a bottom to be established, rather than predicting targets. The intermediate trend has been negative since the top of 5,600-plus in late February. After 11 weeks, the trend should be near exhaustion but a last kick could take it down quite a distance.

The institutional position remains negative, with FIIs being net sellers in the last week. The dollar is testing resistance near all-time highs around the Rs 54 mark. The trend suggests a long dollar-rupee position could be lucrative, with a stop-loss around 53.25.

Among subsidiary sectors, the CNXIT may outperform the market in the next phase. However, it's unlikely to lead a recovery and more likely to range-trade 5,750-6,150. If it falls below 5,750, it could fall till around 5,300.

The Bank Nifty looks bearish. It's testing support around 9,100-9,200 right now and if that is broken, it could fall quite a distance. Since the financial index is high beta and its components have a big weight in the Nifty, it could also lead any recovery. There's resistance between 9,400 and 9,600.

Intra-day volatility has risen after the breakdown. The news flow out of Europe and the US will be influential and the Indian macro-economic numbers (IIP and WPI) have been poor. Earnings in Q4 have also been mediocre so far.

Technically, the position is over-sold. But from experience, in a strong downtrend, the market can remain oversold for a while. We don't have all the relevant derivatives data, such as the Nifty put-call ratio and open interest across option chains, due to a technical glitch at NSE. Hence, it's difficult to extrapolate resistance-support expectations and there may be marginal differences in options premiums.

Under the circumstances, traders can afford to move a step away from money in constructing option spreads. There's plenty of time left in the settlement and volatility could remain high. In the timeframe of the next five sessions, traders should be braced for a swing of 4,600-5,200.

One way to calculate trader expectations is to look at breakevens on hedged positions. A straddle at the money of long 4,900c (83) and long 4,900p (103) is zero-delta. It has breakevens at 4,714 and 5,086. Hence, trader expectations can be roughly judged as 4,700-5,100.

A bearspread of long 4,800p (63) and short 4,700p (35) costs 28 and pays a maximum of 72. A bullspread of long 5,000c (44) and short 5,100c (21) costs 23 and pays a maximum 77. If these two spreads are combined, we get a long-short strangle combination. The cost is 51 and the maximum payoff is 49 with breakevens at 4,749 and 5,051.