The market continues to seek lower levels. After hitting a 52-week low of 4,796 (Nifty), it made a small recovery but it has established a pattern of falling tops and bottoms. So, the intermediate downtrend continues. The institutional attitude is net-negative, with some domestic buying overwhelmed by heavy FII selling. The downtrend began in early August and could run on through the September settlement. Signals suggest all time-trends are in phase and bearish, which means a sharp slide is possible in the September settlement.
Some key levels to watch for the short-term trader would be the 10-Day Moving average (value of about 5,000), the 10-session high at 5,125, and the 20 DMA (value 5,180). A short-term trend reversal would be signalled by a climb above the 10 DMA, and it would probably terminate between 5,125-5,180. An intermediate trend reversal would need to cross 5,225.
On the downside, the next target is 4,795. Chart-based projections and Fibonacci analysis point to possible targets in the 4,500 zone, which is the 50 per cent Fib-retraction level. A breach of 4,800 would imply an immediate drop to 4,650. There is also a chance of range-trading 4,800-5,000. The sector indices are also bearish. The CNXIT's current support is at 5,200 and the Bank Nifty is testing support at 9,250-9,350. Shorts on the Bank Nifty seem marked and stocks in the IT sector also look weak. Recoveries could pull the CNXIT up till 5,500, while the Bank Nifty has huge resistance above 9,550 and again, above 9,800.
September should see a continuation of high intra-day volatility, with a high probability of 150-200 point sessions. Consider three trading possibilities for the Nifty-- A further slide till the 45,00 level, a technical recovery till 5,175-5,200 and range-trading between 4,800-5,000. The Nifty put-call ratio is bearish across all series. Consensus trading expectations would range from 4,500 till 5,200, with a bearish bias.
The Spot Nifty is at 4,890. An option trader should look to exploit excessive volatility by setting up September spreads at some distance from money. In on Wednesdy's session, you could gamble with a cheap Aug long 5,000c (4) if the market starts strong. Alternatively a long August 4,800p (7) could work if the market starts weak. If the market opens near 4,900, a long strangle of August 4,800p and long 5,000c may work because one option will gain more than the other will lose.
Using September options, with a 5-10 session perspective, a bullspread of long September 5,100c (62) and short September 5,200c (38) costs 24 and pays a maximum 76. A bearspread of long 4,700p (92) and short 4,600p (70) costs 22 and pays a maximum 78. These are equidistant from money. The bearspread has better return-risk ratios.The combined long-short strangle position would give a favourable risk-return ratio of net cost 46 and net payoff of 54 with breakevens at 5,146, 4,654. A wider strangle of long 5,200c (38) and long 46,00p (70) can be laid off with a short 4,500p (51) and a short 5,300c (23). This costs 35 and pays a max 65 with breakevens at 4,565, 5,235. The zero-delta nature of the position makes it low risk.
