The Nifty’s uptrend appears to have broken in the past two sessions, when it reacted 150 points. It may find support at the current 5,600 or it may fall lower, which looks likely. Volumes and volatility have risen.
The FIIs have been net buyers for the past 10 sessions, the domestic institutions have been net sellers and retail has been net sellers as well. The 200 daily moving averages (DMA) are nested in the 5,700-5,800 zone and the Nifty failed to break out above the 200 DMA. This means the long-term trend is still bearish, as it has been since November 2010. The July 7 high of 5,751 is the mark to beat in an uptrend. On the the downside, if 5,600 support breaks, the next stop is 5,450. It's possible the market could range-trade 5,450-5,650 as it did earlier. If the 5,450 support does break, we should see 5,200 tested. Through this extended range of 5,200-5,750, there is congestion at roughly 50 point intervals.
The CNXIT is bearish and it could slide significantly if key Q1 results (Infy. TCS) are poor. Below 6,550, the CNXIT could fall till 6,200, or lower. The Bank Nifty has made a downside break and a fall till 10,800 is expected, given chart action. For the Nifty consider three trading possibilities 1). A breakdown below 5,450; 2) a rise above 5,750, with a possible move till 5,850; 3) range-trading between 5,450-5,650. The Nifty put call ratio remains bullish with the July PCR and the overall PCR at about 1.2. Daily volatility is likely to stay up. We may see a couple of 150 point sessions in the next two weeks. The July call chain has OI clustered across 5,600c (94), 5,700c (50) and the maximum at 5,800c (24).
The July put chain has high OI across 5,200p (7), 5,300p (13), 5,400p (24), 5,500p (45) and 5,600p (79). Consensus trading expectations therefore range from roughly 5,200-5,800. With the spot Nifty at 5,616, we can get good return-risk ratios by moving one step away from the money. A July 5,700c and short 5,800c costs 26 and pays a maximum of 74. A long July 5,500p and short 5,500p costs 21 and pays a maximum of 79. The bearspreads offer better ratios.
An on-the-money long straddle at long 5,600c, long 5,600po, costs 173. This can be laid off with a short 5,700c and short 5,500p to reduce the cost to 78. It's a trading position that could generate fast gains if the market moves say, 100 points in either direction. Delta calculations suggest that on a 100-point swing, the long option that's in the money will gain about 50, while the other option will lose around 15.
It's also possible to create a long-short strangle combination with long 5,500p and long 5,700c and a short 5,400p and a short 5,800c. The cost is about 47, and the net one-way return 53. This could be held for a longer-term with breakevens at 5,453, 5,747. If the market swings around, it is quite possible that a smart trader would be able to settle both legs at a profit. Finally a put butterfly with long 5,600p (79), two short 5,500p (2x45) and a long 5,400p (24) will cost 13 and it could gain a maximum 87, if the market falls to 5,500.