A lacklustre opening session on Monday was followed by a mini breakout on Tuesday. The Nifty tested resistance in the 5,350 zone after a slow start. It hit a high of Nifty 5,300 on Monday. Volume action late into Tuesday’s session as Indian traders took the lead from encouraging action in Europe.
The index could rise till 5,450-5,500, though it is yet to overcome resistance at 5,350. There will be resistance at every 50-points. The current technical position is bullish across the long-term and intermediate timeframes and also, on the basis of Tuesday, bullish in the short-term. The institutional attitude is mixed. Foreign institutional investors (FIIs) have been net buyers, but domestic institutions are net sellers.
On the upside, anywhere between 5,450 and 5,500 could be a target in the next 10 sessions. On the downside, there is strong support between 5,175 and 5,200. Although intra-day volatility should increase, an upwards bias is very likely unless the breakout fails with a slide below 5,175.
In the currency market, the rupee could harden further against the USD and Euro. However, any trader going short against USDINR or EURINR should hold stops at around 56.5 and 69.5, respectively.
Among subsidiary sectors, the CNXIT is holding out above support at 6,050, but it’s less bullish than the overall market. This is probably due to the adverse currency factor. The financial index, the Bank Nifty, has performed strongly. It is testing resistance above 10,750 and it has support at 10,500. A long Bank Nifty position looks fairly well-marked.
The Nifty’s July put-call ratio in terms of open interest is quite high, at about 1.5. The overall PCR is also pretty high at 1.4. This is oversold territory and it implies a further upmove. In the July call chain, the OI is mainly clustered between 5,200c (176), 5,300c (102), 5,400c (49), 5,500c (19) and 5,600c (5). The peaks are at 5,400c and 5,500c. The July put chain has a wider spread of OI between 4,900p (3), 5,000p (5), 5,100p (10) and 5,200p (21) and 5,300p (45).
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In terms of the next 10 sessions, I’d say traders expect a further upmove, but they are wary of a potential crash. Since this is early in a settlement and volatility is up, traders can afford to move somewhat far from money to construct spreads with good risk:reward ratios.
It’s unlikely that the market will collapse below 5,150 or rise much above 5,450 in the timeframe of the next five sessions. A close-to-money straddle of long 5,300p and long 5,400c would cost 94, implying that one-session swings of above 125 would be unexpected.
A close to money bearspread of long July 5,300p (45) and short 5,200p (21) costs 24 and pays a maximum of 76. This is a good risk:reward ratio. An on-the-money bulspread of long July 5,400c (49) and short 5,500c (19) costs 30 and pays a maximum 70 also has a good RR.
A long-short combination strangle can be created using slightly far from money spreads. A long 5,500c (19), long 5,200p (21), short 5,600c (5), short 5,100p (10) costs a maximum of 25. It offers one-way maximum returns of 75, with breakevens at 5,175 and 5,525. This is a zero-delta position and very tempting since both ends may be struck.