The market hit a new 2010 intra-day high on July 23 (Nifty at 5,477) and then continued to consolidate above support at 5,350. The trading range has remained narrow in the past week with most sessions between 5,400 and 5,450. Volatility has stayed low. Carryover has been reasonable, but volumes remained relatively low in both futures and options (F&O) as well as cash segment.
The market eased on Wednesday, but it is still in a current trading range (5,350-5,450) that seems too narrow to be sustained. A move till 5,275 or till 5,550 is likely on a breakout, but that is unlikely to occur in a single session. However, it could happen in the next five sessions.
In theory, the intermediate trend should top out at around 5,500, but it is also week 10 of the uptrend and we could be close to a reversal. So, the chance of a downside breakout is quite high. If the trend does reverse, we will see the market drop till around 5,275 in the first phase of the next intermediate downtrend.
Institutional opinions remain opposed. Domestic institutional investors (DIIs) remain net sellers, while foreign institutional investors (FIIs) have been buyers. Neither set is committing large sums however, which explains the lack of volumes and the tight-ranging pattern.
There are background signals of weakness. Breadth is nearly balanced, but declines are starting to outnumber advances. The subsidiary indices, like the BankNifty and the CNXIT (both of which were outperforming the Nifty) have weakened in the past few sessions. The BankNifty, in particular, could be worth a short as traders get increasingly nervous about the impact of rising policy rates. Private banks are looking weaker than the PSUs. The infrastructure and realty sectors are both looking weak as well.
In the derivatives segment, open interest (OI) has continued to rise in both futures and options. The Nifty put-call ratio remains bullish across all time-frames with values at the 1.4 level in terms of OI.
In the perspective of Thursday's trade, traders should stay focused on 5,275-5,500. In the context of the next five sessions, they could brace for an up-move till 5,600, or a drop till 5,150.
August spreads close to money have acceptable risk-reward ratios. The long August 5,500c (57.5 premium) and short 5,600c (26) costs 31.5 and pays a maximum of 68.5.
The long August 5,300p (71.5) and short 5,200p (47) costs a net 24.5 and offers a big maximum return of 75.5.
Strictly, in the context of Thursday, a straddle combination of a long July 5,400p (22) and long July 5,400c (18) – costing a net 40 – is an interesting gamble. If the market moves beyond 5,360-5,440, there could be a major return.
However, this is against the odds due to the expiry factor. Taking a straddle or strangle using August options will be much better value for money by next week.
