The market saw a sharp recovery after hitting a new 52-week low of 4,720. The pattern of lower lows continues. But the recovery on Monday could mean a reversal in intermediate trends. The institutional attitude remains net-negative, though there was some FII short covering on Monday. Most of the action appeared to be driven by operators and retail traders. The downtrend began in early August, so, it could run on through 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 and 5,180. An intermediate trend reversal would need to cross 5,225 to be confirmed.
On the downside, the next target would be around 4,650 on the basis of chart-based projections. Fibonacci analysis points to possible targets in the 4,300 zone, which is the 50 per cent Fib-retraction level. There is also a good chance of range-trading the level of 4,750-5,050.
The sector indices also saw recovery. The CNXIT's current support is at 5,200 and the Bank Nifty dipped below 9,000 before pulling back to 9,350. The Bank Nifty could run up till it hits huge resistances between 9,550 and 9,650. Recoveries could pull the CNXIT up till 5,500. If the Bank Nifty passes 9,650, it will probably test 9,850.
September should see a continuation of high intra-day volatility with a high probability of several 150-200 point sessions. Consider three trading possibilities for the Nifty. One, a further slide till the 4,300 level with a drop till 4,650 in the next 3 sessions two) A technical recovery till 5,125-5,200 three) Range-trading between 4,750 and 5,050. The Nifty put- call ratio (PCR) has recovered to a bullish level at current PCR values of 1.3.
The Spot Nifty is at 4,922. An option trader should look to exploit high volatility by setting up September spreads at a distance from money. A bullspread of long September 5,100c (60) and short 5,200c (35) has a good risk:reward ratio, with a net cost of 25 and maximum return of 75. Similarly, a bearspread with long 4,800p (86) and short 4,700p (63) costs 23 and could pay a maximum 77. The bearspread is better because it has a higher return:risk ratio and it's a little closer to money.
With a 10-session perspective, it is worth combining the above to create a position with a long strangle, offset by a short strangle. The net cost is 49 and the maximum return on either side is 51, with breakevens at 4,751 and 5,149. There's a decent chance of collecting profits from both sides of this position.
Ignoring the mild skew in delta, a long straddle at long 4,900p (119) and long 4,900c (150) should gain around 40-45 in value if the Nifty moves till either 4,800 or 5,000. Another view is to assume the market will oscillate between 4,750 and 5,050 for some sessions. Then, a call butterfly of long 4,900c (150), two short 5,000c (2x98) and long 5,100c (60) costs a net 14, and it pays a maximum 86 at 5,000 levels, with breakevens at 4,914, 5,086.
