The market continues to range trade while slowly sliding lower. The short-term trend is indeterminate. But the Nifty has dropped from a high of 5,448 ten sessions ago, to a current level of between 5,250 and 5,300. Volume action has remained reasonable.
The intermediate trend must still be reckoned up but the support between 5,250 and 5,300 is critical. If that is broken, the intermediate trend is very likely to reverse. The long-term trend would be tested if the market dropped below the 200-Day Moving Average (DMA), which is placed around 5,175.
If the Nifty stays above support at 5,250 through this week, it will probably test resistance above 5,450 sometime within the next ten sessions. A downwards breakout below 5,250 could pull the market down to the key support in the zone of 5,150-5,200. If there's a dip below the 200-DMA, the long-term trend will go bearish.
Intra-day volatility has increased with trading quite choppy. In the currency market, the rupee has hardened versus both the dollar and the euro. The FIIs have remained net positive, which has kept the dollar down.
Among subsidiary sectors, the CNXIT is still above support at 6,000 and testing resistance above 6,150. The Bank Nifty has come under pressure and is at a critical support. It has dropped below the psychologically significant 10,000 level a couple of times. A breakdown could push it till 9,750. On the upside, it might bounce till 10,300.
The Nifty's put-call ratio (PCR) in terms of open interest is verging on the bearish. The long-term PCR (September-November) is at 0.99, while the September PCR is 1.03. OI hasn't really picked up in the October series and beyond yet but this is likely to be a valid signal coupled with the gradual price downtrend.
The September call series has high OI across the range of 5,300c (77), 5400c (37), 5,500c (15) and 5,600c (5). The September put series has a similar range of liquidity with high OI visible between 4,900p (7), 5,000p (15), 5,100p (29), 5,200p (54). Both in the money options, 5,200c (135) and 5,300p(93), also have high holdings.
An interpretation of the OI distribution could be that traders are expecting a wide movement - the ranges are symmetrical and consistent with a 350 point swing, given that the index is poised at 5,254. A full-scale breakout from the current range would indeed imply a move of at least 150 points in the direction of breakout.
The zero delta strangle of 5,300c and 5,200p costs 131 and gives traders a rule of thumb about likely movements in the next four sessions. The breakevens points of roughly 5,070 and 5,430 should not be exceeded in that period.
The trader can look for wide spreads since the settlement has just started. But the risk-reward ratios are okay close to money. The close to money bullspread of long September 5,300c and short 5,400c costs 40 and pays a maximum 60.
The CTM bearspread of long September 5,200p and short 5,100p costs 25 and pays a maximum 75. The bearspread has a better risk:reward ratio and the positions are practically zero-delta. Combining wider strangles of long 5,400c, and long 5,100p with a short 5,500c and a short 5,000p costs 37 with a one-sided maximum payoff of 63. The breakevens are at around 5,063, 5,437.