The market has seen a reaction over the past three sessions, falling below support at 5,175 and sliding to a low of 5,075. On Monday, support in the 5,175-5,200 zone was tested. The index is now hovering just around the 200-Day Moving Average so, this is a critical zone.
Volume action was weak through the past few sessions though heavier on the downtrends. Institutionally, foreign portfolio investors were bullish until the past three sessions while domestic institutional activity was bearish but muted.
The short-term trend is negative. The intermediate trend seems to have broken down. As mentioned above, a fall below 5,050 or thereabouts would be a bearish long-term signal. On the upside, the level of 5,225 would need to be breached to registered renewed bullishness for the intermediate trend. Intra-day volatility has not been very high.
In the currency market, the rupee could slide now against the dollar and maybe against the euro as well, provided FII attitude remains negative. However, any trader going long against USD/INR or EUR/INR should hold stops at around 55.90 and 68.00 respectively.
Among subsidiary sectors, the CNXIT has been hard hit. Poor results and guidance from Infy and Wipro has kept the IT index below 5,600. There could be some short covering but Infy and Wipro look headed for new lows and so does Educomp.
The financial index, the Bank Nifty is holding onto support above 10,200 in the unlikely hopes of a rate cut. If it falls below 10,200, it could dip till 9,950 levels. This may happen in the next five sessions so a short in the Bank Nifty rolled over looks like a decent gamble. On the upside, a cut might take it back till 10,400-10,500.
The Nifty's put-call ratio in terms of open interest has fallen considerably and it's in bearish terrain at about 0.91. Given settlement considerations and expiry effects, there are pricing imperfections in the option chain.
The effect of the low intra-day volatility has also driven down premiums in the August series. So if there's a big movement, a trader who is long options far from money stands to gain a lot. In the very short-term, a July long straddle of long 5,100c (26) and long 5,100p (13) would breakevens if the market moved till 5.060, 5.140. So this could be a good position.
If the market does break out beyond 5.050-5.200, it could easily make a move till either 5.350, or 4,800. In terms of the next ten sessions, traders could look for a target zone of 4,800-5,400. Low August premiums offer spreads with very good risk:reward ratios.
The on-the-money straddle of long Aug 5,100c (126) and long Aug 5,100p (89) costs 215, and the breakevens of 4,885, 5,315 is roughly the limit of most trader expectations. A far-from the-money bullspread of long Aug 5,200c (74) and short 5,300c (38) costs 36 and could pay a maximum 64. Similarly, a far from-the-money bearspread of long 5,000p (57) and short 4,900p (34) costs 23 and could pay a maximum 77. These are both decent risk:reward ratios.
A long straddle of long 5,300c, long 4,900p combined to a short strangle of short 5,400c (17), short 4,800c (20) costs 36 and offers maximum one-sided payouts of 64.