The market jumped to a new 2010 high after seeming to be in a correction mode last week, when it slid to a low of 5,350. However, this move to a high of 5,589 (close 5,577) may give the intermediate bull trend a fresh leg and certainly requires target recalculation.
In effect, the market has moved up from 4,800 in late May. This is substantial, both in terms of magnitude as well as time. As of the short term, there is support between 5,500 and 5,550 and, below that, at 50-point intervals. On the upside, this zone hasn’t been traded for over 30 months.
The upturn was on the basis of solid institutional support with both foreign institutional investors (FIIs) and domestic institutions (DIIs) being buyers.
Volumes were reasonable without showing much expansion. I’d read this as the last upturn in a 14-week intermediate uptrend with another correction due, but the long-term signals look bullish.
The lack of recent resistance in the current zone could mean a surge to 5,750 or beyond if the buying continues for another two sessions. On the downside, support at 5,350-5,375 may be the critical point for an intermediate trend reversal. If the market does drop below 5,350, it is likely to head into a four-eight week period of net losses with the bottom coming at either 5,225 or 5,100.
The BankNifty and CNXIT backed the upturn in the broader market. Both sector indices will probably continue to run with the broader market, but the BankNifty is likely to be more volatile in either direction. Volatility is likely to increase and the breakout could catch traders who have got used to calm and small trading ranges.
In the context of next week, traders should be braced for a 200-250 point in either direction, till either 5,800, or 5,300. However, premiums far from money don’t reflect that, and the Vix has fallen.
The Nifty put-call ratio is in the normal, bullish range. Open interest (OI) in September options (which constitute 65 per cent of total Nifty OI) have a put-call ratio (PCR) of 1.6, while the overall PCR (in terms of OI) is around 1.4.
At an index of 5,576, a bullspread of long 5,600c (54) and short 5,700c (18) offers a potential maximum return of 64 on a cost of 36.
The near-the money bearspread of long 5,500p (42) and short 5,400p (25) costs 17 and offers a maximum return of 83. Even given the greater distance from money, the bearspread is quite tempting.
One of these near-the-money spreads would be struck for sure in the next week and it’s tempting to suggest a combined long-short strangle. That would cost 53 and offer a potential maximum return of 47 with breakevens at 5,447 and 5,653.
A more aggressive long 5,700c, long 5,400p costing 42 is also possible. This can be laid off with a short 5,900c (2) and short 5,200p (8) for a net cost of 31.
The breakevens are at 5,368 and 5,732 and the potential gain is 168.
