The market hit a new 2010 high on August 23 but it’s reacted in the last two sessions. On time-factor, the chances of an intermediate correction is high. The high of 5549 on August 23 was almost bang on projected target (5550). The previous bottom was 4786 on May 25. The intermediate uptrend has therefore been in force for three months. It is very rare for an intermediate trend to last that long or longer.
There is supports at 5450, and roughly every 50 points down. However, if this is the beginning of an intermediate downtrend, a dip below 5350 would be confirmatory. If so, a fall till 5100 over the next 4-12 weeks is likely, with some chance of downmoves ending between 5225-5275.
Volumes are up – this is normal in settlement week. Volatility is also up and the VIX has risen significantly. Declines considerably outnumbered advances on the past two sessions, which is another danger signal. Carryover has been reasonable however.
Institutional attitude was aligned on Wednesday when both DIIs and FIIs sold. However, this could be temporary with FIIs covering long positions. Although DIIs have been consistent sellers, FIIs have been net buyers through the past three months. If the FIIs do become net sellers, an intermediate downtrend is more or less guaranteed.
The market has not yet seen a clear breakout. But traders should be braced for bearishness tomorrow and for a drop till 5275 inside the next 5 sessions. On the upside, even if there’s short-covering, prices are unlikely to exceed 5550, and the trader can safely set 5600 as an outside estimate of potential upside.
Among traded subsidiary indices, both the Bank Nifty and the CNXIT hit new 2010 highs and have subsequently corrected down. The BankNifty looks to be under more downside pressure than the CNXIT.
The Nifty option chain is distorted. There has been a lot of profit-booking in puts over the past two sessions though call open interest has expanded slightly. There’s been a fair amount of carryover in both puts and calls. The Aug PCR ( in OI) is in the normal, bullish range of 1.3 but the overall PCR is 1.7 and Sept onwards, the PCR is at an unsustainable high 2.3.
August spreads are not worth taking due to expiry but a open strangle may be. A long Aug 5500c (7.6) pays handsomely above breakeven at 5507. A long Aug 5400p (3) is also tempting with breakeven at 5397. Combining the two costs around 11 and offers breakevens at 5389, 5511.
In September, a long 5500c (95) and long 5600c (49) costs 46 and pays a maximum of 54. A long September 5400p (90) and short 5300p (64) costs 26 and pays a maximum of 74 . It would be better to wait till post -settlement for potential September strangles.
