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Breakout past 5,250 on Nifty will be a bullish signal

Devangshu Datta/New Delhi 31 Jul 12 | 12:13 AM

The market saw a sharp bounce just ahead of the credit policy. It was driven partially by good global sentiment and partially by hope that the Reserve Bank of India (RBI) will cut rates. The rise till 5,200 pulls the Nifty well above the 200-Day Moving Average (DMA).

Volume action improved on Monday but it was still on the low side in the cash segment. The credit policy could be crucial for the short-term trend. If there is significant cut (50 basis points or more), the market could head North. However, a cut of 25 basis points is more or less expected and if RBI does nothing, the market could fall back below 5,100 again.

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It’s very difficult to define likely trends with the market range-trading around the 200-DMA (roughly at 5,100). On the downside, it has to stay above 5,075, ideally 5,125. On the upside, breakouts past 5,250 could be bullish. Intra-day volatility would increase with a breakout and a clear trending run in either direction.

In the currency market, the rupee could harden against the dollar and maybe against the euro as well, if FII buying pushes equities up. However, a drop in index values is likely to be accompanied by a sliding rupee. Among subsidiary sectors, the CNXIT has managed to pull back till the 5,600 levels. Infy looks set for a bounce after hitting a 52-week low.

The financial index, the Bank Nifty, is hovering above 10,400. It could jump past 10,650 if there’s significant monetary easing. However, if RBI stays put, the Bank Nifty is likely to slide back below 10,100. Other rate sensitives will also move with the Bank Nifty and so will the broader market. Traders should continue to watch for turmoil in the 51 scrips pulled out of the F&O segment. This month will see a lot of negative action and above all, high volatility, in these scrips.

The Nifty’s put-call ratio in terms of open interest has lifted above 1.2, which puts it back in the zone of neutral-to-bullish. An options trader could look for spreads far-from money that will pay handsomely if there’s a breakout or breakdown.

One way of gauging trader expectations is breakevens on the money at 5,200c (100) and 5,200p (86) contracts. Most traders would expect the market to not exceed breakevens, at least by large values, within the week. I’d say a 5,000-5,400 range covers extreme possibilities in the next five sessions.

The August call chain has high open interest (OI) from 5,200c (100), 5,300c (54), 5,400c (25) and a peak at 5,500c (10). The put chain has high OI between 4,700p (4), 4,800p (9), 4,900p (17), 5,000p (31), and 5,100p (52) with reasonably high OI on the money at 5,200p (86). There are some bears or hedgers who are expecting a big crash. A far-from -money bullspread of long Aug 5,300c and short 5,400c costs 29 and could pay a maximum 71. Similarly a far from-the-money bearspread of long 5,100p and short 5,000p 21 costs 21 and could pay a maximum 79. A long straddle of long 5,400c, long 5,000p combined with a short strangle of short 5,500c, short 4,900c costs 29 and offers maximum one-sided payouts of 71.

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