The short-term trend is range-trading between support at Nifty 5,450-5,500 and resistance between 5,600-5,650. The long-term trend is down. We'll have a clearer picture of the intermediate trend only on a breakout.
There are supports and resistance clustered at roughly 50-point intervals. A drop below 5,500 would hit support at 5,450 and again at 5,400. A rise above 5,600 would hit resistance at 5,650, and then 5,700. Breakouts could be till 5,300 or till 5,700. If there's a breakout below 5,320, the intermediate trend would be confirmed negative by lower lows. If there's a breakout above 5,670, the intermediate trend would be confirmed up, by higher highs.
The institutional attitude is lacklustre. But there seems a small upwards bias. The CNXIT is testing resistance at 6,600-plus and finding support at 6,450. The Bank Nifty is holding above support at 10,600. The Bank Nifty's direction could be crucial. It has the potential to climb till 11,150 and thus pull the market up. It could also drop till 10,500 and take the broad market down with it.
Three trading possibilities exist in the next 5 sessions. A breakdown till 5,300 is one. A recovery till 5,700 is another. The third is range-trading between 5,450-5,650 and that looks most likely. The Nifty put call ratio (PCR) is in the normal zone. The June PCR and the overall are both at around 1. Daily volatility could average 100-125 points in the next 5 sessions.
The June call chain has rising open interest from 5,600c and a huge bulge at 5,800c, followed by a steep fall in open interest (OI). The June put chain is more evenly distributed. It has OI bulges at 5,000p and 5,400p and good liquidity all strikes between 5,000-5,500. The consensus seems to be moves between 5,300-5,800 with some hedging a bigger downside.
Close to money (CTM), risk:reward ratios are good. A bullspread of long June 5,600c (60) and short 5,700c (28) costs 32 and pays a maximum of 68. A bearspread of long June 5,500p (77) and short 5,400p (46) costs 31 and pays a maximum of 69.
Combining CTM bull+bear spreads to create a long-short strangle position has an adverse risk:reward ratio of 37 payoff each way with a cost of 63. Both sides of this could be struck. It's better to move away and create a long 5,400p and long 5,700c strangle combined to a short 5,300p (27) and a short 5,800c (11) strangle. This cost 36 and has breakevens at 5,364, 5,736.
Butterflies are quite tempting and they can be combined if the trader is prepared for multiple brokerages and believes the market will stay between 5,450-5,650. But it's better to take a directional view with a call butterfly if bullish, or a put butterfly if bearish.
A call butterfly of long 5,500c (109), two short 5,600c (2x60) and long 5,700c (28) costs a maximum of 17, breaks even at 5,517, 5,683, and pays a maximum 83 at 5,600. A put butterfly of long 5,600p (125), two short 5,500p (2x77) and a long 5,400p (46) also costs a maximum 17, breaks even at 5,583, 5,417, and pays a maximum 83 at 5,500.
