Bearish signals have eased

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The market has range traded for the past few sessions. The Nifty has stayed above the recent low of 9,685 (August 11). It has not been able to break out above resistance between 9,925 and 9,950. A move beyond those limits could mean a test of support at 9,450-9,500 or a target of 10,200 (a new high). There's been alternating sessions of gain and loss. But, the VIX has eased down and other bearish signals have also eased off. The advance-decline ratio is positive.


It's possible that this is a pause within an intermediate downtrend. A break below 9,685 would confirm a pattern of lower lows. On the upside, a breakout above 10,137 (the all-time high) would confirm an intermediate uptrend.


Results have not been very good and there have been more downgrades than upgrades. Foreign portfolio investors sold equity through August. Retail investors were also net sellers on Tuesday. Mutual funds and domestic institutions remain net buyers. The rupee softened, to above Rs 64.10 /dollar but it has pulled below 64 in the past few sessions. By definition, the long-term trend is positive. The 200-Day Moving Average (200-DMA) is between 9,000 and 9,100. The last positive intermediate trend (which may still be in force) bounced from support at 9,450 in late June to hit 10,137 in early August.


Taking a longer-term view, the Nifty moved North in late December 2016 from 7,900 levels to a high of 10,137 in early August. The length of time and the magnitude of this move means that an intermediate correction could be severe. The first Fibonacci level is at around 9,250-9,300 and a dip below 9,000 would break the 200-DMA.


Simple trend following systems is always confused by range-trading. The current trend-following signals mostly suggest selling Nifty with a stop-loss at 9,975 or 10,000. Anybody who has open long positions should place stop-losses in the 9,625-9,650 zones.


The Nifty Bank reacted down from an all-time high at 25,200 to 23,822 on August 10, before pulling above 24,000 again. The 23,800 support is critical, though 24,000 is the psychological level many traders watch. The financial index could swing below 23,000 if 23,800 is broken. On the upside, resistance at 24,500 could be hit. If that breaks, 25,000 or higher is possible.


Three big trending sessions in either direction could hit either 23,000 or 25,000 with the Nifty Bank currently held at 24,300. A strangle of long September 31, 25,000c (108), long August 31, 23,000p (68) is not zero-delta - the lower-priced put is much further from money. This lopsided strangle could be offset with short September 7, 25,000c (15), short September 7, 23,500p (25). This is not a calendar spread since all strikes differ. But, the long options will gain if the short one are hit. The net position costs 136.


Put-call ratios (PCR) are not so useful close to settlement. The Nifty PCR is neutral for what it's worth for September-October taken together. The August Nifty call chain has peak open interest (OI) at 10,000c and high OI until 11,000c. The August put chain has very high OI between 9,500p and 9,800p, with high OI down till 9,000p.


The Nifty closed at 9,884 on Wednesday. A bullspread of long September 10,000c (79) short 10,100c (44) costs 35 and pays a maximum 65. This is 115 points from money. A bearspread of long September 9,800p (83), short September 9,700p (60) costs 23, pays a maximum of 77 and is 85 points from money.


These spreads are near zero-delta and could be combined. The resulting position costs 58, with break evens roughly at 9,640, 10,060. One side of this strangle set is near-guaranteed to be hit in the next settlement.

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