The market has dropped significantly in the last five sessions. It may be on the verge of a serious donwmove. The support at 5,000 is currently holding. If that breaks, the short-term target would be 4,900 and a slide till the 52-week low of 4,725 is possible within the next two weeks. On the upside, there's resistance between 5,150 and 5,200.
The bearish pattern of the past five sessions has been driven by renewed FII selling, which has also pushed the dollar up above Rs 50.80. The key indicator of resistance at the 200-Day Moving Averages was not tested in the uptrend after the Diwali. This confirms the long-term trend is still bearish.
The Diwali intermediate uptrend has apparently reversed and the rest of the calendar year could be net bearish. A breakout above 5,200 would be required to develop a positive intermediate outlook again. Barring such an upmove, we'd expect the market to slide or range-trade. The daily high-low swings should continue to be 100-125 points. The index will continue to open with big gaps.
The CNXIT is holding out at key support between 6,150 and 6,200. The Bank Nifty has dropped below 9,000 and the support at the 8,900-9,000 zone is being tested. If that breaks, the financial index will lead the broader market down.
Consider three possibilities by settlement (November 24). One break below 4,900 could mean a slide till 4,700, early into the December settlement. It could mean new 52-week lows. Two climb above 5,200 could mean a rebound till 5,400. Three range-trading may continue, with the Nifty moving between 4,900 and 5,200. The rebound appears least likely.
The overall Nifty Put/Call ratio is almost neutral or slightly bullish at one, but the November PCR is bearish at 0.96. The expiry effect is very visible. Call Open interest is clustered at 5,100c (46), 5,200c (18), 5,300c (5.5) and 5,400c (2). Put OI is clustered at 5,000p (56), 4,900p (26), 4,800p (12) and 4,700p (5).
Consensus expectations are, therefore, between 4,700 and 5,400 in the November series and that's a wide range with just five-six sessions till settlement. An option trader has to stay close to the money due to the expiry effect.
A bullspread of long 5,100c (46) and short 5,200c (18) costs 28 and pays a maximum 72. The bearspread of long 5,000p (56) and short 4,900p (26) costs 30 and pays a maximum 70. These are attractive risk:return ratios, given the potential intra-day range of 125 points.
A long-short strangle combining long 5,200c (18), long 4,900p (26), short 5,300c (6), short 4,800p (11) costs 27 and pays a maximum 73. The breakevens are 4,873, 5,227. This will work if there's a breakout. The downside is far more likely to be struck.
If you take the view that range trading will continue, consider butterflies. A long 5,100p (100), two short 5,000p (2x56) and long 4,900p (26) costs a net 14. It offers profits if the market stays between 4,914 and 5,086 with a maximum return of 86 at 5,000. A call butterfly targeting values of 5,100 would be long 5,000c (93), two short 5,100c (2x47) and long 5,200c (18) costs 17. The breakevens are 5,017, 5,183 and the maximum return is 83 at 5,100.
