The Nifty continues to range-trade with alternating up-and-down sessions. The long-term pattern is bearish. Traders will have to either wait for a breakout or gamble on the range-trading continuing. High intra-day volatility suggests that any breakout, as and when it occurs, will move quite a distance.
The institutional attitude remains net negative. The USD has appreciated substantially versus INR. There is strong resistance above Nifty 5,025, all the way till 5,200. On the downside, support at 4,700 holds with subsidiary support until 4,825. Given lower highs, and bearish long-term trend, a downside breakout is more likely. Chart projections on breakout could be 4,300 or 5,500.
Short-term moving average indicators are giving sell signals but this is a weak signal during range-trading. In the very short-term, the Nifty is ranged between 4,825 and 5,025. A breakout in the next three sessions could hit either 4,700, or 5,175. Daily volatility should stay at about 125 points (daily high-low). The index has persistently opened with gaps of 35-50 points.
The CNXIT's current support is 5,500 and it could gain if the USD stays above Rs 49.20 and definitely if the USD climbs above 50. The Bank Nifty is testing support at 9,150 and further falls till 8,950 seem possible. The long-term trend of the financial index looks quite negative.
Consider three possibilities 1) A slide below 4,700, with a potential fall till 4,300 in the next 10-15 sessions. 2) A recovery till 5,500. 3) Range-trading between 4,700 and 5,100. Range-trading is unlikely to last through October. On breakouts, the targets of 4,300 or 5,500 would be hit in three sessions, given current volatility.
The Nifty put call ratio (PCR) currently looks bullish at PCR values above 1.5. However, the holiday season could be responsible for some distortions in the PCR. Call premiums are expensive close to money, even allowing for high historic volatility. But the positive PCR may signal short-term recovery, perhaps till the 5,100+ level.
Spreads close to money (CTM) have relatively poor risk:return ratios. We can afford to move away from the money, given high volatility, high premiums and a new settlement. The CTM bullspread of long October 4,900c (137) and short 5,000c (91) costs 46 and offers a maximum return of just 54. A CTM bearspread of long October 4,800p (142) and short 4,700p (108) costs 34 and pays a maximum 66.
A bullspread of long October 5,000c (91) and short 5,100c (57) costs 34 and offers a maximum return of 66. A bearspread with long October 4,700p (108) and short 4,600p (80) costs 28 and could pay a maximum 72. The bearspreads look better with higher return:risk ratios.
We can also seek long-short strangles far from money. A long 4,600p and long 5,100c can be combined with a short 4,500p (59) and short 5,200c (33). The net cost is about 46 and the maximum return on either side is 54. This is zero-delta but the return:risk ratio is not so good.
Strictly with a trading perspective, zero-delta strangles may be worth taking close to money in the long October 4,800p and long October 5,000c. This costs a huge 280. But we have near-guarantees that both options will go into the money if the market continues to swing. A clever trader should be able to generate a return of 100-plus profits on the CTM strangle if this happens.
