The recent flash crash makes normal technical analysis difficult. The crash shattered all projected lows and supports. For all analytical purposes, it should probably be ignored. If we eliminate that blip from calculations, the credible support for the Nifty is between 5,625 and 5,675. The trading in the past three sessions has been downbeat, since the last 52-week high of 5,815 was hit on the same day as the flash crash.
So, the parameters for a trader focussed on the next few sessions would be to watch for a breakout above 5,815 or a fall below 5,625. Either move could result in a swing of roughly 200 points in the direction of the breakout till either 5,425 or 6,000. As of now, the downtrend seems a little more likely.
The long-term trend still seems to be up with the Nifty having traded to successive 52-week highs. The short-term trend as mentioned looks bearish and the intermediate trend is indeterminate. A fall below 5400 would indicate a bearish intermediate trend as well. Volumes are reasonable. The FII attitude remained positive until Monday and DII remained consistent sellers in the past week. The dollar found support at 51.50 and it could bounce till 53.50, implying that there may be a period of FII profit-booking.
The subsidiary indices such as the Bank Nifty and CNXIT have both looked weaker than the overall market. The CNXIT will be heavily influenced by Q2 results, which start coming in this week. The Bank Nifty could find support at 11,300. It will be influenced by trader perception of the likely RBI action in the upcoming credit policy. Rate sensitive cyclicals have been adversely influenced by the DLF-Vadra connection, as well as fears that the RBI will not cut policy rates.
Nobody expects great Q2, 2012-13 results. Any positive surprises could be met with strong buying. Political instability, either in India or abroad, with the US presidential elections around the corner, could assume more importance and cause bearish swings.
Derivatives traders should stay braced for big moves. The Nifty's put-call ratio in terms of open interest has weakened. It's at 1.03 for October and at 1.1 overall. Option chain analysis suggests bulk of traders are braced for swings till either 5,825 or 5,525 over the next 5-10 sessions.
Looking at October Nifty options spreads, the near-the-money return to risk ratios seem to be quite reasonable. A trader can also afford to take wider spreads gambling on a big swing. The at-the-money bullspread of long 5,700c (77) and short 5,800c (37) costs 40 and pays a maximum 60. One step further away, a long October 5,800c (37) and short 5,900c (16) costs 21 and pays a maximum 79.
Similarly a long October 5,700p (76) and short 5,600p(40) costs 36 and pays a maximum 71, despite being in the money. One step further away a long 5,600p and short 5,500p (19) costs 21 and pays a maximum 79. If you get these prices, the in-the-money bearspread and the at-the-money bullspread are both obviously attractive.
If we combine the long 5,700c and long 5,700p, the cost of the straddle is roughly 152. We could also combine a long 5,600p, long 5,800c, short 5,500p and short 5,900c. This costs about 42 and pays a maximum one-way return of 58 with breakevens at 5,558, 5,842.