The sharp rise on Monday was operator-driven and appeared to be a correction in a strong downtrend. Volumes were good in cash and excellent in derivatives. Net institutional contribution was very low, albeit positive. Both stock futures and Nifty futures open interest (OI) dropped. ‘Derivatives shorters’ were squeezed out as the market opened high on Monday.
Was the trend strong enough to reverse the intermediate downtrend since the last peak (5,399) on April 7? There’s a lot of resistance between 5,200 and 5,250 and a clearly bearish pattern of lower lows and lower highs exists. So, we’ll probably see another downtrend this week. A close beyond 5,320 would suggest the market is back in an intermediate uptrend.
Among subsidiary indices, the CNXIT (5,890) is seeing a technical recovery that looks unsustainable beyond resistance at 5,925-5,950. Downside supports are between 5,700 and 5,750.
The BankNifty (9,656) looks capable of going till it hits resistance around the 9,775-9,800 mark. Among other sectors, metals contributed the most to both the downtrend and the recovery. Here, too, the uptrend appeared to be driven initially by short-covering in the futures segment.
The option trader would have to be prepared for moves between 5,000-5,400 on a five-session perspective since volatility has risen. Most of the focus is between 5,100-5,300.
The Nifty’s put-call ratio in terms of OI remains normal to bullish in the 1.25 zone. Both put and call OI increased though futures OI dropped.
Bullspreads and bearspreads at the money (5,200) are expensive though they have okay risk-return ratios. A bullspread with long 5,200c (89) and short 5,300c (44) costs 45 and pays a maximum of 55. A bearspread with long 5,200p (93) and short 5,100p (59) costs 34 and pays a maximum of 66. A straddle of long 5,200c and long 5,200p would cost 182 with breakevens at 5,018, 5,382. If you are bearish and take a position at the money, take the bearspread.
Further away, a long 5,300c (44) and short 5,400c (16) costs 28 and pays a maximum of 72. A long 5,100p (59) and short 5,000p (37) costs 22 and pays a maximum of 78. If you are bullish, take this L5,300c, S5,400c, position. It will gain on an upmove even if it’s not struck.
For two-way cover, consider the long-short strangles of L5,100p, L5,300c, S4,900p (24), S5,500c (6). This costs a net 72, breakevens are at 5,028, 5,372. The maximum return on a one-way move is 128. Alternatively, take a short Nifty future with a stop loss at 5,250, coupled to a long 5,400c (16). This has unlimited return below 5,177, and a maximum loss of 73 between 5,250 and 5,400.
