A big session on Friday confirmed an upwards trend. The Nifty made a breakout above the 5,200 level. It hit a high of Nifty 5,300 on Monday. Volume action improved on Friday at least. The FII attitude seems to have changed to net positive.
The breakout could take the index till 5,450-5,500 though there will be resistance at every 50-points or so. The current technical position would have to be classified, as bullish across the long-term and intermediate timeframes. In the short-term, there could be reactions till the 5,200 level.
The breakout defines some levels which the trader can watch for. On the upside, anywhere between 5,350 and 5,500 could be a target in the next 10 sessions. On the downside, there is strong support between 5,175 and 5,200. Although, intra-day volatility should increase, an upwards bias is likely unless the breakout fails with a slide below 5,175.
In the currency market, the rupee could harden further against the dollar and the euro. So, traders who held long USDINR and long EURINR positions until Friday would be well-advised to reverse and short. There are possible stop-losses at 56.55 (USDINR) and 71.25 (EURINR).
Among subsidiary sectors, the CNXIT is holding out above support at 6,050 but it's less bullish than the overall market. This is probably due to the adverse currency factor. The financial index, the Bank Nifty, has performed strongly. It is testing resistance above 10,400 and it has support at 10,200. If you take long Bank Nifty positions, stop-loss in the region of 10,125-10,200.
The Nifty's July put-call ratio (PCR) in terms of open interest (OI) is quite high, at about 1.5. The overall PCR is also pretty high at 1.4. This is oversold territory and it implies a further upmove. In the July call chain, the OI is mainly clustered between 5,200c (152), 5,300c (92), 5,400c (50) and 5,500c (23). The peaks are 5,300c and 5,400c. The July put chain has a wider spread of OI between 4,800p (6), 4,900p (10), 5,000p (19), 5,100p (33) and 5,200p(58) and 5,300p (96).
In terms of the next ten sessions, I'd say that traders expect a further upmove but they are wary of a potential crash. Since this is early in a settlement and volatility is up, traders can afford to move somewhat far from money to construct spreads with good risk:reward ratios.
It's unlikely that the market will collapse below 5,150 or rise much above 5,450 in the timeframe of this week. A rough rule of thumb about expectations can be calculated by looking at the on-the-money positions at 5,300. A straddle at 5,300 of long 5,300c and long 5,300p would cost 187, implying support and resistance at roughly 5,100 and 5,500.
A close to money bearspread of long July 5,200p (58) and short 5,100p (33) costs 25 and pays a maximum of 75. But it makes sense to move any bullish positions further out. A bullspread of long July 5,400c (50) and short 5,500c (23) costs 27 and pays a maximum 73.
A long-short combination strangle can be created using far from money spreads. A long 5,500c (23), long 5,100p (33), short 5,600c (10), short 5,000p (19) costs a maximum of 27. It offers one-way maximum returns of 73, with breakevens at 5,073, 5,527. This is not a zero-delta position since the puts are appreciably further from money.