The market continued range-trading with a bearish bias after the RBI policy rate hike. Volumes and volatility have picked up as settlement comes closer. Institutional attitude has been net positive. But the FIIs have sold since the rate hike and overall institutional volumes have been minimal.
There's fair support at Nifty 5450 and 5500 and strong resistance above 5,650, 5,700. The 200 Day moving averages are nested in the 5,700-5,800 zone and the Nifty has failed to break out above the 200DMA. So we can assume the long-term trend is bearish.
An intermediate pattern of lower highs has formed with the July 7 high of 5,751 being followed by the July 25 high of 5,702. This suggests the trend could be weakening. On the the downside, if the 5,450 support breaks, the index could drop till 5,200-5,250. It's also possible the market will continue to range-trade 5,450-5,650. On the upside, a breakout would be valid only if it moves above 5,750 and in that case, we'd expect a climb till 5,900-plus.
Sector indices are bearish. The CNXIT could hold at support around 6,200. On the upside, the CNXIT could be limited by resistance at 6,650. There may be excessive volatility in this sector due to currency instability. Right now, the Euro is strengthening but the USD may snap back in August.The Bank Nifty has clearly broken down after the rate hike. It could see a downside till support at the 10,400-10,500 levels while there's upside resistance at 11,300 and again at 11,500.
For the Nifty consider three trading possibilities 1). A breakdown below 5,450; 2) a rise above 5,750, with a possible move till 5,950; 3) range-trading between 5,450-5,650. The Nifty put call ratio is bearish going into July settlement session with a 0.9 PCR for July and 1.0 PCR for August. Carryover has been reasonable but there's scope for a lot of CO today.
Daily volatility could be high with a couple of 150-point sessions within the next five. The August call chain has OI clustered across 5,500c (135), 5,600c (84), 5,700c (47), 5,800c (24) and 5,900c (12). The August put chain has high OI across 5,200p (16), 5,300p (29), 5,400p (49), 5,500p (81) and 5,600p (127). Consensus trading expectations therefore range from roughly 5,200-5,900.
The Spot Nifty is at roughly 5,547. A one-session strangle of long July 5,600c (8) and long July 5,500p (10) costs 18 and if there is a big swing, this could pay handsomely with breakevens coming at at 5,482, 5,618. Good return:risk ratios are available for August spreads if we move slightly away from money. A long Aug 5,700c and short 5,800c costs 23 and pays a maximum 77. A long Aug 5,400p and short 5,300p costs 20 and pays a maximum 80. A wide strangle combination of lone Aug 5700c and long Aug 5400p coupled to a short 5200p and a short 5900c costs a net 68. It has breakevens at 5332, 5768 and a maximum return of 132. This would work if a breakout occurs within August. The other tempting position is a put butterfly with long 5600p (127), two short 5500p (2x81) and a long 5400p (49). This costs a maximum 14 and it could gain a maximum 86, if the market hovers at 5500.