Intermediate trend positive, 5,125 level crucial

Last Updated: Mon, Jun 11, 2012 19:50 hrs

Markets started off on a strong footing today and the Nifty even rose above the 200-day moving average (DMA) briefly. However, the Nifty was unable to remain above the 200 DMA and the chart has some bearish implications.

Monday's high of Nifty 5,125 was a bearish double-top formation. Liquidity and volumes have improved. The institutional attitude has been positive. However, concerns on Europe, as well as the next policy decision of the Reserve Bank of India, will certainly affect the future direction.

If the bearish double-top is valid, the market will react down through the next few sessions. If the 5,125 level is broken, the Nifty could rise till the 5,200-plus levels and maybe 5,300. On both upside as well as downside, there is congestion at every 50 points or so.

The long-term trend is difficult to read. The intra-day penetration of the 200 DMA is a positive signal but the inability to stay above that level is negative. The intermediate trend would be rated positive but again, the 5,125 level is crucial. To maintain a pattern of higher highs, the 5,125 level must be exceeded. The short-term trend is probably negative, given heavy selling at the end of Monday's session. On the downside, 4,750-4,770 is the level to watch for a serious breakdown.

The currency market is also confused. The dollar dipped but the rupee appears unable to strengthen below 55. A long dollar/rupee remains a valid trade according to trend following systems. Set a stop-loss at somewhere between 55-55.25 if you are long dollar/rupee. The euro/rupee looks interesting. Right now, a long position looks good but there could be a big swing in the opposite direction if the Greek vote is adverse.

Among subsidiary sectors, the CNXIT is under-performing the overall market. The tech index may test support at 5,700-5,800. The financial index, the Bank Nifty, made a big breakout when it moved from 9,450 to 1,0150. However, it seems to be in correction mode and could fall back till the 9,400-9,500 levels. The movement depends on rate cut expectations.

The Nifty’s put-call ratio in terms of open interest is quite high now, at above 1.6 for the June series. This may not be sustainable but at first reading, it suggests the market has some upside. Open interest (OI)in the June call chain has a build-up from 5,000c (127), 5,100c (73), 5,200c (37) and 5,300c (17). The put chain has a big OI buildup from 4,500p (7) with a lot of OI 4,600p (11), 4,700p (18), 4,800p (29) and a peak at 4,900p (47). The 5,000p (76) also has high OI.

My assessment would be that a lot of traders are hedging the possibility of big swings till either 5,300 or 4,500. It's still relatively early in the settlement and there are many potential triggers in the third week. Intra-day volatility is also likely to climb.

A bearspread of long June 5,000p (76) and short 4,900p (47) costs 29 and pays a maximum of 71. A bullspread of long June 5,100c (73) and short 5,200c (37) costs 36 and pays a maximum 64. These are both reasonable ratios.

If you wish to hedge two-way moves, a long-short combination strangle can be created a little further from money. A long 5,200c, long 4,900p, short 5,300c, short 4800p costs a maximum of 38. If offers one-way maximum returns of 62, with breakevens at 4,862, 5,238.

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