The Nifty has range-traded in the past couple of weeks, with a lot of intra-day volatility and alternating up-and-down sessions. This is perhaps the most difficult type of pattern to cater to. The intra-day volatility carries high risks and the absence of a trend makes projections difficult.
The institutional attitude remains net negative, with heavy FII selling not being counter-balanced by moderate DII buying. As a result of this, and of global trends, the dollar has also appreciated substantially against the rupee.
There is strong resistance for Nifty above 5,175 and, on the downside, the support at 4,700 holds. Given a pattern of lower highs, and a bearish long-term trend, a downside breakout seems more likely. Chart projections on a breakout could be about 4,300, or 5,500 on the upside.
On what it is worth (which is not much) during this range-trading period, short-term moving average trending indicators are giving sell signals. In the very short term, there has been range-trading between 4,900 and 5,000. A breakout in the next two sessions could hit either 4,700 or 5,100. Daily volatility is likely to stay in a range of 125-155 points (high-low daily difference) and the index has persistently opened, with gaps of 35-50 points from the previous close.
The CNXIT’s current support is 5,500 and it could gain on the basis of the strong dollar, offering some hedging value for high-beta IT stocks. The Bank Nifty is currently above support at 9,450 and bounded by resistance at 9,700. Breakdown could be till 9,050-9,100 and the upside on a breakout may be 9,900. The long-term trend is negative.
High intra-day volatility will continue in October, with a likelihood of 150-200-point swings every few sessions. Consider three possibilities — first, a slide below 4,700, with a potential fall till 4,300 in the next 15 sessions; second, a recovery till 5,500; and third, range-trading between 4,700 and 5,100. Range-trading is unlikely to last through October. Breakouts will probably require two or three sessions, given the current volatility.
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The Nifty put-call ratio (PCR) looks neutral to bullish at PCR values of 1.3 and the carryover in derivatives has been reasonable so far. A trader operating with the perspective of the next five sessions or so can restrict focus to the range between 4,600 and 5,300, because breakouts/breakdowns in that timeframe should not move further.
Spreads close to money have reasonable risk:return ratios, but we can also afford to move away from money and create wide spreads, given the high volatility and the new settlement. A bullspread of long October 5,100c (79) and short 5,300c (25) costs 54 and offers a maximum return of 146. A bearspread with a long October 4,800p (110) and short 4,600p (85) costs 25 and could pay a maximum 175. The bearspread is better with a higher return:risk ratio.
In a 10-session perspective, long-short strangles are worth looking for. Combining the above bullspread and bearspread, the net cost is about 78 and the maximum return on either side is 122, with breakevens at 4,722 and 5,178. This is a low-risk, zero-delta position with excellent chances of two-way returns over the October settlement. Strictly in a one-session perspective, a zero-delta strangle may be worth taking in the long September 4,900p (17) and long September 5,000c (9). This breaks even if the market moves beyond 4,874 and 5,026, which is on the cards.