The Nifty failed to cross the resistance at 5,175, falling back in a sharp sell-off yesterday. The pattern suggests last week’s uptrend was over, since key short-term indicators went into sell mode. There was a fair amount of institutional selling, especially by FIIs, on Monday.
The intermediate downtrend that began in early August could, therefore, be assumed to continue. Time-calculations suggest it could run on through the September settlement (September 29). The index is again trading below its 10-day moving average (DMA) and 20-DMA.
There was a brief crossover buy signal, but that has closed. While the Nifty did manage a brief pattern of higher-highs at 5,175 last week, Monday’s fall which hit 4,911, sets up a pattern of bearish lower-lows.
The current support at 4,900 is likely to be broken and then the index could retrace all the way till 4,700 and lower, if the intermediate downtrend persists till September 29. Chart-based targets on the downside would be in the range of 4,650. On the upside, 5,175 is the level to beat.
Key sector indices crashed on Monday. The CNXIT’s current support is 5,200. The Bank Nifty is currently testing support at 9,350. Recoveries will hit resistance at 9,550. On the downside, 8,900 is a possibility, so shorting the financial index seems marked. Of course, high-beta financial stocks like Axis Bank, YES Bank and Reliance Capital might fall more than the Bank Nifty itself.
The CNXIT is testing support at 5,150 and it has major resistance between 5,300 and 5,350. The potential downside could push it below 5,000. Unfortunately, the index itself is illiquid but high-weighted IT stocks may be shorted.
High intra-day volatility will continue with a likelihood of 150-200 point swings every few sessions. Consider three possibilities: 1) A slide below 4,900, with a fall till 4,700 in the next five sessions. 2) A recovery till between 5,125-5,200. 3) Range-trading between 4,900-5,100. Range-trading is unlikely to last – a breakout may occur in just one session.
The Nifty put call ratio (PCR) continues to look bullish at PCR values of 1.4 — this is likely to correct downwards as more puts are opened and calls extinguished. The option call chain shows high liquidity at 5,000c (98), 5,100c (57), 5,200c (29) and 5,300c (13) with open interest (OI) peaking at 5,200c. The put chain shows liquidity peaking at 4,700p (60) with plenty of liquidity also available at 4,800p (83), 4,900p (113). Given the OI, consensus expectations are in the range of 4,600 to 5,300.
Spreads close to money have reasonable risk:return ratios but we can afford to move away from money, given the high volatility. A bullspread of long September 5,100c and short 5,200c costs 28 and offers maximum return of 72. A bearspread with long 4,800p and short 4,700p costs 23 and could pay a maximum 77. The bearspread is better with a higher return:risk ratio.
With a 10-session perspective, it is worth looking for long-short strangles. Combining the above bullspread and bearspread, a long 5,100c and long 4,800p is offset with a short 4,700p and short 5,200c. The net cost is about 50 and the maximum return on either side is 50 with breakevens at 4,750 and 5,150. This is a low-risk, zero-delta position with excellent chances of two-way returns though the risk: return ratio is even.
