High volatility, wide trading ranges could continue in June

The market seems to be range-trading just below its 52-week high of 6,225 points, going into the May settlement. The FIIs continued to be heavy net buyers while domestic institutional selling has increased.

The Nifty reacted from a recent 52-week high of 6,225, clearly an advance on the prior 52-week highs of 6,114 and 6,111. By definition, the long-term trend is up. Volatility has also increased with several big sessions of 2% plus or minus.

The intermediate trend is probably up while the short-term trend is range-trading. There is a lot of resistance between 6,100-6,250. On the downside, support at 6,025 has been tested and there is further support at 25-point intervals.

The index bounced on April 10 from a low of 5,477. It has hit 6,225 in late May. Given that move, Fibonacci retracements suggest potential corrections till 5,950 or 5,850 are possible in the next intermediate downtrend.

If the index drops below 5,725, it's likely to be a long-term bear market. On the upside, it obviously has to beat 6,225. Technically, speaking moving average systems are all signalling buy. But the current choppy trading pattern is not conducive to MA trading systems.

The Bank Nifty, which is very high-beta, remains key. The financial index has support between 12,650-12,725, which it has tested recently. On the upside, it has heavy resistance at 13,150 and obviously, it has to beat its 52-week high of 13,414 to confirm a continuing uptrend.

The put-call ratios for the Nifty remain bullish, ranging at above 1.35. However this close to settlement, PCR is not a good indicator. Carryover is strong so far.

The high volatility and wide trading ranges could continue through June. Be prepared for domestic political instability and possible overseas shifts in stance, which could lead to sudden bursts of selling or a major trend reversal. The market has incidentally, adjusted to this since June premiums are ranging higher and the USD is uptrending.

Options traders can look for positions at some distance from money in the June series. In May itself, the settlement session could see a tight move since the spot Nifty is at 6,104 and a straddle of long May 6,100c (19) and Long May 6100p (32) has breakevens at roughly 6,059, 6151.

If you can stomach the risk, sell June options at 5,900p and 6,300c with the intention to buyback on Friday when they decline.

The Nifty is braced for a 200-250 point swing in either direction in the first 5 sessions of June. There's excellent open interest till around the 6400c on the upside. On the downside, there's good OI till 5,600p.

Risk:reward ratios are acceptable one step from money. A bullspread of long June 6200c (70) and short 6,300c (40) costs 30 and pays a maximum 70. A bearspread of long 6,000p (71) and short 5,900p (45) costs 26 and pays a maximum 74.

One can combine the on-the-money bearspread and bullspread for a set of long-short strangles. This entails taking a long 6,200c, long 6,000p offset with a short 6,300c and a short 5,900p. This combination costs 56 and pays a maximum of 44 with breakevens at 6,256 and 5,944. The ratio is adverse and taking the spread is inadvisable.

Taking a view, if the market does stay bullish, the 6300c (40) and 6400c (21) bullspread could be very profitable. Otherwise, traders may wait till Monday. GDP data on Friday could help establish a trend and, June premiums will also drop once the settlement starts.