Support at 5,050 likely to be broken

The market made a decisive downside breakout registering a succession of new 52-week lows. Once the support at Nifty 5,450 was broken, the market slid to 5,054 within a few sessions. Volumes and volatility remained high. Institutional attitude is net negative with massive FII selling outweighing DII buying. There’s some support at 5,050, but that is likely to be broken. On the upside, there was resistance at 50-point intervals above 5,200, with very heavy resistance at 5,350 and 5,450.

The long-term, intermediate and short-term trends are all bearish. On the upside, a reaction or technical correction will probably end at 5,450. On the downside, the next key level is the Fibonacci 38.2 per cent retraction zone at 4,800.

The sector indices are also bearish and have made commensurate lows. The CNXIT’s current support is at 5,550-5,650, and the Bank Nifty is testing support at 10,050-10,150. Excessive volatility is likely to continue in both key sectors. The forex market is also exceedingly volatile. Recoveries could pull the CNXIT up till 6,000 while the Bank Nifty has huge resistance above 10,750-10,800.

There could be three trading possibilities for the Nifty: 1) A further slide till the 4,800 level; 2) A technical recovery till 5,450; and 3) Range-trading between 5,000 and 5,350. The Nifty put call ratio (PCR) is bearish in the near month as well as in the overall period. The PCR is 0.99 overall and around 0.85 for August.

Daily volatility could continue to be high in the coming week with several 125-150 point sessions. The August call chain has high open interest (OI) clustered at 5,100c (142), 5200c (90), 5,300c (52), 5,400c (28), 5,500c (14), and substantial but lower OI at 5,600c (8) and 5,700c (4). The August put chain has high OI across 4,700p (28), 4,800p (41), 4,900p (61) 5,000p (86), 5,100p (120), 5,200p (166). Consensus trading expectations therefore range from roughly 4,700-5,500.

The spot Nifty is at 5,118. It is fairly early in the settlement and we can expect big swings. So it is possible to set up spreads further from money. An on-the-money long straddle of long 5,100c and long 5,100p costs 262 and this would gain about 15-25 in net value on a 100-point swing. Both sides could well be settled at profit and could be tempting despite the high costs.

However, much better return:risk ratios are available far from money. A long Aug 5,200c and short 5,300c costs 38 and pays a maximum 62. A long August 5,000p and short 4,900p costs 25 and pays a maximum 75.

A wide strangle combination of long August 5,300c and long August 4,900p coupled with a short 5,400c and a short 4,800p costs a net 44. This will have breakevens at 4,866, 5,344 and a maximum return of 56. It is also possible that both sides will be settled at profit.

Given the fact that all three trends are in phase and bearish, a simple short futures position on August Nifty is also possible. Keep a stop loss in the 5,200-5,225 zone and hedge the upside with a long 5,300c. The position has theoretically unlimited returns below 5,060. The futures position could lose around 100 if the stop loss is hit, but the long call will gain by around 20-25.