The market broke to a new three-month low before it made a recovery. The support at Nifty 4,775 was tested. There is strong resistance above 5,000. Volumes improved a little on Monday's bounce. The serious money will wait for global or domestic news triggers like the Greek vote and the Reserve Bank of India (RBI) policy. Both these events come up in the third week.
The long-term trend is negative, with the 200-day moving average range between 5,050 and 5,100. The short-term and intermediate trends appear to be negative with a new set of lower lows. Two key levels to watch are 4,770 on the downside and 5,020 on the upside. Breakouts beyond those points would define the direction of the intermediate trend.
If the market establishes a downtrend by breaking below 4,770, it could drop till the 4,550 level. On the upside, there's resistance between 5,000 and 5,125. Breakouts beyond 5,125 would suggest the long-term trend had reversed.
The USD has made a succession of higher highs. But there was some rupee recovery on Monday. The long USDINR trade remains valid, but set a stop-loss between 55.00 and 55.25. Also, look out for volatility in the EURINR futures. The Greek situation (and Spain) could cause massive volatility and a trader who calls the direction right will make a killing.
Among subsidiary sectors, the CNXIT has its upside capped by resistance at 6,100-6,200, while there's support at 5,750-5,800. The Bank Nifty has swung between 9,100 and 9,800 in the last 10 sessions. In the very short-term, it has support at 9,050 and resistance above 9,500. RBI is talking the rupee up and may opt for a rate cut. So, the financial index could be a major driver for the overall market. A fall below 9,050 could mean a crash till 8,500, while push above 9,550 might mean the 9,800-9,900 level being tested.
The Nifty's put-call ratio in terms of open interest is quite healthy at above 1.4. Hence, the short-term trend is likely to be oriented north. OI in the June call chain has a buildup from 4,800c (142), 4,900c (89), with a peak at 5,000c (51) and fairly high interest at 5,100c (26), 5,200c (12) and 5,300c (five). The put chain has a big OI buildup at 4,500p (30) and quite a lot of OI at 4,600p (47), 4,700p (71), 4,800p (105). The 4,400p (19) also has high OI.
My assessment would be that a lot of traders are hedging the possibility of a breakout and big swings till either 5,300 or 4,500 or 4,400. It's early in the settlement and given the plethora of potential triggers in the third week, it could happen. Intra-day volatility is also likely to climb.
A bearspread of long june 4,800p (105) and short 4,700p (71) costs 34 and pays a maximum of 66. A bullspread of long June 4,900c (89) and short 5,000c (51) costs 38 and pays a maximum 62. Thesse are reasonable ratios.
But the trader can afford to move a little further away. A long 5,000c and short 5,100c costs 25, while a long 4,700p and short 4,600p costs 24. Combining these two spreads offers a potential one-way return of 51 on a cost of 49. Breakevens for the combination long-short strangles would come at 4,651, 5,049 with a chance of profits on both legs.
