The market has entered a pattern of range trading with strong support between 6,000 and 6,125 and big resistances between 6,175 and 6,225. Volumes have dropped in the F&O segment though cash market is still robust. The FIIs continue to be net buyers, the domestic institutions remain net sellers and retail players are increasing their selling.
There's been a drop in momentum. This could mean that a long-overdue correction is about to start. The Nifty was in an intermediate uptrend between late May and its 32-month high of 6,223 on October 6. But the charts do not confirm an intermediate correction yet. A dip till 5,975-6,025 would strengthen the bearish signal.
The CNXIT and Bank Nifty have led and outperformed the Nifty through the past 18 months. Both these key sectoral indices are now relatively under-performers. This is another signal that the overall trend could weaken.
A prudent trader would not rule out a further surge, however, though a correction appears much more likely. An upside till 6,357 in October (settlement is October 28) is possible. Any intermediate correction would knock 250-300 points off, with the Nifty sliding between 5,800 and 5,900.
The Nifty put-call ratio is in a normal-bullish range with the overall PCR (in terms of OI) being in the 1.3 zone and the October PCR is somewhat higher at around 1.4, with about 66 per cent of OI being in October. Premiums have settled down with the VIX falling, which suggests that market expectations are not very fearful.
My instincts going into the next three-five sessions would be a continuation of the range-trading with some downside bias looking more likely than an upsurge. Over the rest of October, I'd expect a falling trend as well but there's likely to be a decisive downside breakout at some stage and acceleration of the downtrend..
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Option spreads close to money are offering reasonable risk:reward ratios. A long 6,200c (73) and short 6,300c (36) bullspread costs 37 and offers a maximum return of 63. A long 6,100p (70) and a short 6,000p (43) costs 27 and pays a maximum of 73. This is unusual – the bearspread is actually closer to the money (Spot Nifty 6135) but it has the better risk:reward ratio. However, there's been a lot of intra-day option premium swings and traders must stay alert to the possibility of reversing any spread if there's a quick buck to be made.
Given a possibility of some net losses with solid support available at 6,000, an interesting position could be a long put butterfly. This could be created with a long 6,100p (70), two short 6,000p (2x43) and a long 5900p (25). The net cost is around 10 with breakevens at 6,090; 5,910. The maximum gain would be 90 if the market hovers at 6,000.