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Short-term range trade likely between 4,950 and 5,200

Last Updated: Mon, Oct 24, 2011 19:51 hrs

Range-trading continues in the settlement. The long-term pattern remains bearish. The institutional attitude was negative last week, with both FIIs and DIIs selling. The rupee slid below 50 against the dollar. The index has repeatedly tested resistance between the Nifty 5,125 and 5,175, and failed to break out.

On the downside, there's support every 50 points, or so. Chart projections on breakouts beyond 4,700-5,200 could be 4,300, or 5,500. The average per session movement (high-low range) is about 100 points and the market is consistently opening with gaps of 30-50 points.

Given a truncated trading week with lots of news flow, there may be nervousness. In the very short-term, the Nifty is likely to stay ranged between 4,950 and 5,200. A breakout early in the next settlement could push it till 4,700, or till 5,400. Carryover into November is not pronounced yet. This will mean frenetic action at settlement and it will be a high-volume session.

The CNXIT has risen above 6,000, which is key support. It's hit resistance between 6,150 and 6,200. The Bank Nifty is above support at 9,500. But it looks weak and could lead an overall breakdown, given the trend of RBI credit policy.

Consider three possibilities for the period till November 4. A break below 4,900 with a slide till 4,700, could set up a fall till 4,300 in the November settlement; a climb above 5,225 may mean recovery till 5,500; range-trading with the index continuing to move between 4,700 and 5,200.

The Nifty put call ratio (PCR) remains bullish with PCR values above 1.5. There are bulges in open interest (OI) in the November call series at November 5,200c (103 premium) and at November 5,400c (33). In the November put series, there's an OI bulge in November 5,000p (93) and good OI down to 4,700p (32).

Consensus expectations are therefore between 4,700 and 5,400. With the spot Nifty at 5,098, a day-trader could try to exploit a swing early on settlement with a close-to-money (CTM) long October 5,000p (3), or a long October 5,000p (5).

Looking at the November series, the CTM bull spread of long 5,200c (103) and short 5,300c (63) costs 40 and pays a maximum 60. The CTM bear spread of long 5,000p (93) and short 4,900p (66) costs 27 and pays a maximum 73. These are fair risk-return ratios.

Moving slightly away, a long November 5,300c (62) and short 5,400c (33) costs 29 and pays a maximum 71. A long 4,900p (66) and short 4,800p (46) costs 20 and pays a maximum 80. The further from money bull spread makes sense, while the far-from money bear spread improves the risk-return ratio slightly.

A long-short strangle combining long 5,300c. Long 4,900p, short 5,400c, short 4,800p costs 49 and pays a maximum 51. Breakevens are 4,851, 5,349. This will work only if there's a breakout in November but there's a good chance of that.

The market has already range-traded for a considerable period. Logic would suggest that it's waiting for a resolution in Europe and perhaps, a clarity on the Libya (and crude oil) situation. Events on either front could trigger a breakout. If you take the view that range trading will continue, look at put butterflies. The long 5,000p (93), two short 4,900p (2x66) and long 4,800p (46) costs a net 7 and offers profits if the market stays anywhere between 4,807 and 4,993.

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