Brace for continuation of the bear market

The market remains unsettled. The short term trend is unclear. China remains volatile. The foreign institutional investors (FIIs) sold heavily through August. The rupee is under pressure. The Nifty, the Sensex and other indices are all trading well below their respective 200-Day Moving Averages (200-DMAs).

Traders should be braced for a continuation of the bear market. Volumes have been quite high, which is a poor signal when prices are falling. Declines also outnumbered advances through last week and Monday.

The last index bottom was at Nifty 7,667 on Tuesday. The current upside resistance is seen at 8,050 and the last minor peak was 8,091 on Friday. Volatility expectations remain high. So, do option premiums in September.

The long-term trend might have turned negative. The intermediate trend seems to be negative as well. Apart from the 200-DMA signals, there is a pattern of lower peaks and lower troughs. The short-term trend could be bottoming out and reversing to positive, or sideways.

The next trough would have to be above 7,667 to break the pattern of bearish lower lows. The next peak would have to move above the exponential 200-DMA (now at 8,270) to offer hope that the long-term bull market remains in force. A move above the simple 200-DMA (at 8,448) would be a very positive signal.

As of now, this has the hallmarks of a long-trend bear market. We will have to wait for a few more peaks and troughs to be established to confirm. Given that there has been a long bull market, the bear market could also last a long time. But we cannot as yet guess as to the length of time the market might stay down, or the depth of possible correction. In fact, as stated above, there isn't even confirmation it is a bear market, as yet.

In the meantime, the rupee is below 66.48/dollar. Any subsequent pullback may be due to profit booking. The rupee is very likely to move lower if FII selling continues. A weaker rupee would also mean hedging into information technology and pharmaceutical stocks.

The Bank Nifty has, as always, lost more ground than the Nifty itself and it has great influence on the broader index. September is likely to continue to be volatile. A long strangle on the Bank Nifty of long 16,000p (160) and long 18,000c (204) costs 364 (about 1.07 percent). This could gain handsomely if September is volatile.

The Nifty's put-call ratios (PCR) are back to mildly bullish, from very bearish, with PCR now at 1.15 for both the 3-month and 1-month series. The Nifty's call chain for September has peaks at 8,000c, 8,200c, 8,500c, and 9,000c. The September put chain has open interest (OI) peaks at 7,400p, 7,500p, 7,600p, 7,800p and 8,000p.

Given very high premiums, a trader could consider selling options at say, 200 points from money with the intention of buying back in a couple of sessions. If the market stays range-bound, premiums will fall. Alternatively the trader could move some distance from money and seek relatively cheap long-spreads.

A bullspread of long Sep 8,200c (98), short 8,300c (64) costs 24 and pays 76. A bearspread of long Sep 7,800p (128), short 7,700p (101) costs 27 and pays a maximum 73. The bullspread is 230 points from money, while the bearspread is 170 points away.

These could be combined for long-short strangles with 49 pay off for a cost of 51. Alternatively they could be reversed and sold for two-three sessions if the market stays range bound. But it looks better to take long strangle in the Bank Nifty if a trader is looking for two way coverage.