The market reopened after the May Day weekend with very low volumes and bearish overtones.. However, support at 5,220 held and there are two more significant supports at 5,150-5,175 and 5,200. Apart from being a low-volume situation in general, Monday also saw both foreign institutional investors (FIIs) and domestic institutional investors (DIIs) indulge in net sales, albeit in small quantities.
Despite poor breadth and low volumes in both cash and derivatives segment, the open interest (OI) situation looked healthy with expansion.
The Nifty put-call-ratio in terms of OI also stayed in reasonably bullish territory at around 1.25.
The market is in an intermediate downtrend and that makes lower prices very likely. The market very rarely goes up or even remains stable when institutions are selling in tandem. Also, both the key subsidiary indices – the CNXIT and BankNifty – are looking weak and, again, when those two high-weighted segments drop in tandem, the Nifty is likely to slide as well.
The BankNifty, incidentally, has reliable support only at 9,600-9,630, while the CNXIT seems to have made a downside breakout and looks worth shorting with a stop loss at 5,950.
However, the solid support at current levels may take time to erode. As and when support is broken at 5,200, the market will have a downside target of at least 100 more points, till 5,100, though it may halt again at 5,150.
In the context of the settlement, prices dropping till the 4,900-zone is very likely.
In terms of the next three sessions, the trader has to cater to several scenarios. One is a range-trading pattern between 5,200-5,300 (this implies a small recovery). Another is a drop till 5,100. The third is a reversal of the intermediate trend back to bullish. This is unlikely but not impossible — it will be signalled by a move beyond 5,320.
There's not too much that can be done about range-trading. A bullspread of long 5,300c (65) and short 5,400c (30) costs 35 and pays a maximum of 65. A bearspread of long 5,200p (102) and short 5,100p (67) also costs 35 and pays a maximum of 65.
The bearspread is nearer to the money and that position looks more likely to work.
However, the bullspread will gain in practice if there is a pullback to even around the 5,275-level.
Two-way positions, such as a long straddle of long 5,100p and long 5,400c, costs about 97 and it has break-evens at 5,003 and 5,497. It would start making serious money only if the market moved till either 4,900, or 5,600. This is unlikely to work in the near term but it may work if it's held till settlement.
