The market saw a small correction on Tuesday. After hitting a high of 6,073, the Nifty slid to a low of 5,979 on the settlement eve. There were very high volumes in both the cash segment and the F&O. The intermediate up-move has lasted way beyond normal at 17 weeks.
Short-term supports exist at 5950, and roughly 50-point intervals on the downside. On the upside, there is strong resistance between 6,050-6,150. This week should see prices confined between 5,850-6,150.
The pattern through September has been FII buying to the tune of net Rs 21,000+ crore, which more than compensated for Rs 11,400 crore of the net DII selling. Action cycled through many sectors with metals at the centre stage.
There are two interesting questions regarding October. One, will the market hit a new all-time high (beating Nifty 6337)? The other, will there be an intermediate correction and if so, how deep will such a correction go?
The answer to the second question is easier. The chances of an intermediate correction in the next 5-10 sessions are very high. Fibonacci calculations suggest a pullback of 5-7 per cent. That means a potential downswing of 300-400 odd points. An up-move till 6,350+ could mean a similar 5-7 per cent upswing and can’t be ruled out. The October settlement could therefore see a move of +/- 5 per cent from current levels.
The Bank Nifty and CNXIT have been flat through the last 5-10 sessions, while the dollar has lost ground versus the rupee. Any major swing in the Nifty will need participation and probably outperformance on the part of the BankNifty, which would move in the direction of the broad market. A downswing could see dollar-hardening since it would imply the FIIs were no longer buying strongly. The CNXIT could lose less ground than the Nifty in that case. The Nifty put-call ratio is in an extreme range despite many puts being extinguished on Tuesday. The September PCR is at 2.8 and the overall PCR is 1.8.While this suggests an oversold situation in theory, in practice such high PCRs (above 1.7) are often associated with a sell-off. So, I’d expect a volatile settlement session, with downside pressure. The only September spread that looks worth taking is a long strangle at-the-money. A long Sept 6,000c (19) and a long Sept 6,000p (21) have a combined cost of 40. With breakevens at 5,960-6,040, there seems to be a pretty good chance of making money on this position.
Otherwise, go with the October bearspreads and bullspreads, at one step away from money. A bullspread of long Oct 6,100c (98) and short Oct 6,200c (62) costs 36 and pays a maximum 64.
A bearspread with long Oct 5,900p (89) and short 5,800p (63) costs 26 and pays a maximum of 74.