The market hit a new 2010 intra-day high (Nifty, at 5,453) on July 14 and then corrected to consolidate support at 5,350. The trading range has been very narrow in the past week. Volatility is low with just eight sessions till settlement. Carryover has been okay and volumes reasonable without being great, in both F&O as well as cash segment.
The current trading range (5,350-5,450) seems too narrow to be sustained. A move till 5,275, or till 5,475, is extremely likely. If the upside breakout was valid, and the move till 5,450 suggests that it is, we could see a move till 5,525-5,550 by settlement day (July 29). The intermediate trend has been up for the past nine weeks. An intermediate trend can last anywhere between six and 12 weeks. So, maturity may be near. If the trend does reverse, we may see the market drop till around 5,200.
The current situation can be understood in terms of the opposed views of key market participants. Domestic institutional investors (DIIs) have been heavy sellers in the past six sessions, while foreign institutional investors (FIIs) have been even heavier buyers. If a consensus in the institutional trading attitude occurs, the market will move in the direction of that consensus. Most background signals are reasonably positive. Breadth is on the good side of average with advances somewhat outnumbering declines. The subsidiary indices, like the BankNifty and the CNXIT, are both capable of outperforming the Nifty in the next few sessions. The BankNifty, in particular, could be the driver for an upsurge in the overall market and is worth a long position.
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. We can expect derivative volumes and carryover to climb sharply in the next seven-eight sessions.
In the perspective of this week, traders should stay focused on 5,200-5,550. In the context of settlement, they could brace for an up-move till 5,600, or a drop till 5100. However, it is possible that a full breakout may not occur, though the range could extend (5,275-5,475).
Spreads close to money have good risk:reward ratios. The long July 5,400c (52 premium) and short 5,500c (15) costs 37 and pays a maximum of 63. The long July 5,300p (35) and short 5,200p (16) costs a net 19 and offers a big maximum return of 81.
If you believe volatility will rise, take a strangle combination with long 5,500c and long 5,300p, offset with short 5,200p and short 5,600c (4). The net cost is 31 and the break-evens are at 5,269, 5,531. The max return is 69 on a move to either limit of 5,200, 5,600.
