The Nifty held on to gains at the 5,000 level. It is not clear yet if this is a short-term uptrend or an intermediate trend reversal. The long-term trend is still assumed to be down. There has been some nominal net institutional buying in the past few sessions.
The downtrend began in early August. Therefore, it could run on through the September settlement with this being just a short-term pullback. The index is trading above its 10-day moving average and testing its 20-DMA, so, an aggressive short-term action will be to go long.
The 10-DMA has not yet given a crossover buy signal against the 20-DMA. A key level to watch is the recent (September 2) high of 5,113. An intermediate uptrend should first beat 5,113 and then test heavy resistance between 5,175-5,200. The 10-DMA (current approx value of 4,915) should also lift above the 20-DMA (current approx value of 5,015) to confirm an intermediate buy signal.
On the downside, immediate supports are available from 4,950 downwards at roughly 50 point intervals. If the long-term trend stays bearish and there is no intermediate trend reversal, the next downside target is 4,650. Fibonacci analysis points to targets at 4,300, the 50 per cent Fib-retraction level.
Key sector indices saw some recovery. The CNXIT’s current support is at 5,200. The Bank Nifty is currently testing huge resistance between 9,550-9,650. Recoveries could pull the CNXIT up to 5,500. If the Bank Nifty passes 9,650, it would probably test 9,850 and given the high weight of financials in the Nifty, that could force the overall market up.
There will be a continuation of high intra-day volatility, with a likelihood of 150-200 point sessions. Consider three possibilities: 1) A slide below 4,900, with a fall to 4,700 in the next five sessions; 2) A recovery till between 5,125-5,200 or may be higher; 3) Range-trading between 4,900-5,050. However, range-trading can be ignored — the range is so narrow, it could be broken inside one session.
Also Read
The Nifty put call ratio has recovered to bullish levels at the current PCR values of 1.4. The option call chain shows high liquidity at 5,000c (129), 5,100c (79) , 5,200c (44) and 5,300c (23) with gradual tapering off of open interest above 5,400c (12). The put chain shows liquidity peaking at 4,700p (46), with plenty of liquidity at 4,800p (63), 4,900p (87) and 5,000p (121). Since the spot is at 5,017, the 5,000 options are on the money. Consensus trading expectations range from roughly 4,700 to 5,400.
A bullspread of long September 5,100c and short 5,200c costs 35 and offers a maximum return of 65. A bearspread with long 4,900p and short 4,700p costs 24 and could pay a maximum 76. The bearspread is better with a higher return:risk ratio.
With a 10-session perspective, it is worth looking for long-short strangle combinations. A long 5,200c and long 4,800p can be offset with a short 4,700p and short 5,300c. The net cost is 39 and the most return on either side is 61 with breakevens at 4,761 and 5,261. A long straddle at long 5,000p and long 5,000c costs 250. This is expensive. But it’s a low-risk, zero-delta position and should gain 30-40 in value on a 100-point swing.