Intermediate trend looks positive

Last Updated: Wed, Jun 27, 2012 19:51 hrs

The Nifty stayed above the 200-day moving average (DMA) in narrow range trading. It hit a high of 5,194 and a low of 5,040 in the last 10 sessions. Volume action dwindled. As of now, both foreign and domestic institutions appear to be net sellers so retail is carrying the market.

Although support above the 200-DMA held, it's difficult to say that the long-term trend is clearly bullish. The lack of volume and the narrow range makes trends difficult to diagnose. The intermediate trend seems positive - we've seen higher lows and higher highs. The short-term trend is indeterminate.

A clearer diagnosis would be possible if the Nifty either rose above 5,225 or dropped below the 200-DMA and closed below it. An upside breakout would probably set up targets of somewhere 5,350-5,450. Ideally, volumes should expand on any breakout or breakdown.

In the currency market, the rupee remains down against both euro and dollar. A long USDINR remains a valid trade. The EURINR is more likely to see a sudden reversal. Set a stop-loss somewhere between 56.50 and 56.75 if you are long USDINR in July contracts. A long EURINR should have a stop between 70.50 and 70.75.

Among subsidiary sectors, the CNXIT is holding out above support at 5,950. The financial index, the Bank Nifty, had a sharp breakdown from the 10,200 level to 9,750. It's subsequently recovered to above 10,000 but is showing a pattern of declining tops. If selling pressure pushes it below 9,750, it could fall till 9,450 and take the broader market down with it. A short Bank Nifty position looks like a good bet with a stop-loss at around 10,250.

The Nifty’s June put-call ratio (PCR) in terms of open interest (OI) is very high, at above 1.9. The overall PCR is also pretty high at 1.75. This is highly oversold territory and it could mean a sharp up move. However, a large chunk of the put OI is in contract that are very distant from the money.

In the June series, the expiry effect is evident with most traders focussed on the very narrow range between 5,100 and 5,200 where both the call and put OI peaks. In the July call chain, the OI is mainly clustered between 5,100c (139), 5,200c (85), 5,300c (48) and 5,400c (24). There are twin peaks at 5,200c and 5,300c. The July put chain has a wider spread of OI between 4,700p (13), 4,800p (21), 4,900p (34), 5,000p (54) and 5,100p(83) with a peak at 5,000p.

In terms of the first week of the July settlement, I'd say that trader expectations are focussed between 4,700 on the downside and 5,300 on the upside. Given the new settlement it makes sense to hope for breakouts and place spreads further from money. But the close-to-money spreads also offer decent risk:reward ratios.

A close to money bearspread of long July 5,100p (83) and short 5,000p (54) costs 29 and pays a maximum of 71. A bullspread of long July 5,200c (85) and short 5,300c (48) costs 37 and pays a maximum 63.

If you wish to hedge two-way moves, a long-short combination strangle can be created using slightly further from money spreads. A long 5,300c, long 5,000p, short 5,400c, short 4,900p costs a maximum of 43. It offers one-way maximum returns of 57, with breakevens at 4,957-5,343.

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