Short-term trend negative

The market cracked on Tuesday, reacting upon triggers of global weakness and the release of a list of shell companies by the Securities and Exchange Board of India (Sebi).  The dip was accompanied by a noticeable spike in the VIX and by several other bearish signals. This follows on the heels of a credit policy that disappointed the market.
 
Corporate results continue to be more or less in line with consensus — expectations were not very high. Foreign portfolio investors (FPIs) have sold equity through August though they have continued to buy debt. Mutual funds, domestic institutions and retail all remain net buyers but retail players sold direct equity on Tuesday. The advance-decline ratio went negative.
 
The breakout hit a new high of 10,137 Nifty and by definition, the long-term trend remains positive, given new highs. But the short-term trend looks negative. It’s too early to try and determine the intermediate trend.
 
Optimists were hoping for a 50 basis point cut in policy rates. There was disappointment when the Central Bank only cut by 25 bps and the statement was slightly on the gloomy side. Forex rates remain stable and the rupee has strengthened since the Reserve Bank of India (RBI) policy was announced. 
 

The short-term trend bounced from support at 9,450 in late June. It was a one-sided trend with successive resistances broken until the index climbed till 10,137, which will the level to beat in the next uptrend.  This correction has broken one key support at 10,000. There's decent support below at every 50 points or so.
 
Taking a longer-term view, the Nifty moved North in late December 2016 from 7,900 levels. The length of this up-move (in both time and magnitude) indicates the next intermediate correction could be severe. The first Fibonacci level is at around 9,250-9,300 and a dip till 8,850-8,890 may occur in the next intermediate downtrend if it tests the 200-day moving average.
 
Simple trend following systems would suggest staying long in the Nifty futures. But, the index is fairly close to short-term stop loss levels, since those would be largely in the 9,900-9,950 zone. Some short-term traders will go short, with a stop at 10,150 perhaps. The VIX has spiked to a three-month high. This suggests traders are nervous. Put-call ratios are giving bearish signals but this is early in a settlement where PCR may be misleading.
 
The Nifty Bank also broke out to a new high at 25,200. It's reacted down to 24,600. The August settlement is quite long and a swing till 23,500 or till 25,500 could occur if there are three big trending sessions.  A strangle of long August 31, 25,500c (61), long August 31, 23,500p (49) is not zero-delta but either side of this strangle could be hit in the next four weeks.  This position is relatively cheap. It can be offset with a short August 17, 25,500c (14), short August 17, 24000p (40). This is not a calendar spread since the strikes differ. But, the long options would gain if the short strikes were hit. 
 
The August Nifty call chain has peak open interest (OI) at 10,500c and high OI until 11,500c. The August put chain has very high OI at 9,800p, with high OI all the way below, till 9,000p. The Nifty closed at 9,979 on Tuesday. 
 
A bullspread of long August 10,100c (61) short 10,200c (33) costs 28 and pays a maximum 72. This is 120 points from money. A bearspread of long August 9900p (71), short August 9,800p (47) costs 24, pays a maximum of 76 and is only 80 points from money. These spreads could be combined. The resulting position is not zero-delta. It would cost 52, with breakevens roughly at 9,848, 10,152. One side is likely to be hit.