The Nifty is staying just above its own 200-day moving average (DMA), which implies that the intermediate trend is still up. but in trouble. We can expect net gains through June. But the next three-four sessions could be very choppy, or possibly negative.
The key levels to note are the following: The exponential 200-DMA is around 4,900, the simple 200-DMA is 5,000. The Nifty should find support in between the two. The 2010 high was around 5,400 and a healthy long-term bull market would be confirmed if the index rose above that. If the market does drop below 4,900, it is likely to test support at 4,750-4,800. Also, since the 200-DMA would be violated, one would have doubts about a continuing long-term bull market.
The CNXIT and BankNifty are both looking weak at the moment and the CNXIT is quite vulnerable to selling by foreign institutional investors (FIIs), which continues. In fact, institutional participation, both by FIIs and domestic institutional investors (DIIs), has been net negative and low in volumes. Cash volumes are low and that's not a great signal. The Nifty put-call ratio is into the zone above 1.5 where the market looks oversold because expectations are heavily skewed towards further losses.
We're seeing a pattern that is heavily influenced by global cues and those are changing day-to-day. As a result, we've not had three consecutive sessions with moves in the same direction. The best guess for the rest of the week is that the market will stay stuck in the zone between 4,900 and 5,150. However, traders with a slightly long-term perspective should be prepared for moves between 4,700 and 5,300, and somebody who is looking at the entire June settlement should be prepared for moves between 4,600 and 5,400.
Close-to-money bullspreads and bearspreads are both offering decent risk:reward ratios. A bullspread with long 5,100c (70) and short 5,200c (33) costs 37 and pays a maximum of 63. A bearspread with long 5,000p (105) and short 4,900p (73) costs 32 and pays a maximum of 68. Both are quite attractive.
Two other option positions are worth considering. One is a combination long-short strangle with a long 5,200c (33) and long 4,800p (51) coupled to a short 5,400c (5) and short 4,600p (24). This costs a net 55 and pays a maximum of 145 if the market does hit the limits of 4,600, or 5,400. It could be profitable if held till settlement.
The other position that is worth looking at with a time-frame of holding till settlement week is a Long Call Butterfly with long 5,100c (70), two short 5,200c (2x33) and a long 5,300c (14). This costs 18 and that's the maximum loss. If the market moves between break-evens at 5,118 and 5,282, it generates some profits with a maximum return of 82 at 5,200.
