The market continued to range trade but it slid towards the lower end of the trading zone of the Nifty 5,300-5,450 zone after testing the upper ends. The short-term trend seems to be down the Nifty has dropped from a high of 5,448 to a low of 5,315 in the past five sessions. Volume action has been reasonable. The FIIs were positive in attitude until Monday but the DIIs have been net sellers.
The intermediate trend must still be reckoned up but the support between 5,250 and 5,300 is critical. If that is broken, one would suspect the intermediate trend will reverse.
The long-term trend would be tested if the market dropped below the 200-Day Moving Average (DMA), which is placed around 5,175.
If the Nifty stays above support at 5,250-5,325, it will probably test resistance above 5,450 early into the September settlement. A downwards breakout below 5,250 could pull the market down to the zone of 5,150-5,200. If there's a dip below the 200-DMA, the long-term trend will go bearish.
Intraday volatility has increased closer to expiry. In the currency market, the euro hardened versus the dollar and that led to some softening of the dollar versus the rupee as well. However, the bearish short-term trend has meant that the dollar is moving up again.
Among subsidiary sectors, the CNXIT is outperforming and testing resistance above 6,150. The Bank Nifty has come under pressure and is at a critical support. It could drop below the psychologically significant 10,000 level and head down till 9,750. On the upside, it might bounce till 10,300 on short covering before expiry.
The Nifty's put-call ratio (PCR) in terms of open interest is close to 1.7 in the August series, which is bullish. Expiry effects are very obvious. However, the PCR is considerably lower, though still bullish at 1.3 for the entire outstanding open interest (OI). My interpretation would be that traders are expecting a burst of short-covering in the next two sessions.
The August call series has very high OI at 5,400c (8) and 5,500c (1). The September call series has more even distribution with high OI between 5,400c (78), 5,500c (40), 5,600c (18), 5,700c (7). The August put chain has high OI between 5,000p (0.5), 5,100p (1), 5,200p (2), 5,300p (9). The September put chain has a similar OI distribution between 5,000p (12), 5,100p (20), 5,300p (36) and 5,400p (62). An interpretation of the OI distribution could be that traders expect big swings in September with a possible range of 5,000-5,700. A full-scale breakout from the 5,300-5,450 range would mean a move of at least 200 points in the direction of breakout.
In the very short-term, an August spread of long 5,300p and long 5,400c costs just 18 and it would breakeven if the market hit either 5,282 or 5,418. In September series, the trader can look for wider spreads. The bullspread of long September 5,500c and short 5,600c costs 22 and pays a maximum 78. The bearspread of long September 5,200p and short 5,100p costs 16. The bearspread has a better risk:reward ratio and its nearer the money as of now. But both spreads look reasonable.
Combining gives a position of long-short strangles with a total cost of 38-39, and a one-sided maximum payoff of 61-62. The breakevens are at around 5,162, 5,538. There is a significant chance of payoffs on either side.