If 5,450 support breaks, index could drop to 5,200-5,250

Last Updated: Mon, Aug 01, 2011 19:30 hrs

The market held above support at 5,475 but it seems to have a bearish bias. Volumes and volatility remain high. Institutional attitude has been net positive but the volumes have been taken. There's fair support at Nifty 5,450-5,475 and strong resistance at 5,650-5,700 with congestions at 50-point intervals. The long-term trend is bearish. The 200-day moving averages are well above the price line.

The intermediate trend seems bearish or indeterminate, with a pattern of lower highs but no confirmation with lower lows. If the 5,450 support breaks, the index could drop till 5,200-5,250. On the upside, a breakout may occur if the market crosses 5,750. If that happens, the rise could go till 5,900-plus and there's a chance of the long-term trend reversing. In between 5,450-5,650, there's scope for range-trading.

Sector indices are bearish. The CNXIT could hold at support around 6,200. On the upside, it has resistance between 6,450-6,500. There may be excessive volatility in IT due to currency instability in both the US and euro zone. The Bank Nifty has clearly broken down after the rate hike. It could see a downside till support at the 10,400-10,500 levels and there's resistance at 11,100 and again at 11,300, and 11,500. Consider three Nifty trading possibilities -- A breakdown below 5,450, with a downside till at least 5,200-5,250; a rise above 5,750, with a possible move till 5,900-5,950; range-trading at 5,450-5,650. The Nifty put call ratio (PCR) is neutral or signalling a mild upside in the short-term. The PCR is 1.1 for August and around 1.2 overall.

Daily volatility could be high with a couple of 125-point sessions within the next five. The August call chain has open interest (OI) clustered across 5,500c (115), 5,600c (67), 5,700c (35), with a falling off after 5,800c (16) and 5,900c (7). The August put chain has high OI across 5,100p (8), 5,200p (15), 5,300p (28), 5,400p (50) and 5,500p (83). Consensus trading expectations therefore range from roughly 5,100-5,900.

The Spot Nifty is at 5,518. It's early in the settlement and a lot of possible positions exist. In the short term, a trading position would be a straddle at 5,500 with long 5,500c and a long 5,500p. This costs 198 and it is nearly zero-delta. If the market moves 100 points either way, the value of the position will rise by around 20-25. If it range trades, both sides could be hit.

Good return-risk ratios are available for simple August spreads and we can stay slightly far from money, since it's early in the settlement. A long Aug 5,600c and short 5,700c costs 32 and pays a maximum 68. A long Aug 5,400p and short 5,300p costs 22 and pays a maximum 78. A wide strangle combination of long Aug 5,600c and long Aug 5,400p coupled to a short 5,200p and a short 5,800c costs a net 86. This has breakevens at 5,314, 5,686 and a maximum return of 114. It works if a breakout comes within August. The other tempting position is a put butterfly with long 5,500p (83), two short 5,400p (2x50) and a long 5,300p (28). This costs a maximum 11 and it could gain a maximum 89, if the market hits 5,400. The breakevens are at 5,489, 5,311—the upper breakeven is very close to money.

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