Nifty(5132): The short-term divergences in the charts are getting more pronounced. This is analogous to an auto mobile continuing on its path without fuel but on residual motion.
I can also count a small degree wave 5 that is nearing completion. Volume footprint tells us that the area of 5090 and 5070 is very crucial and might act as the bull-bear divide in the short-term. Since the previous day’s low is just slightly below this level at 5056 that must the stop for those who are long on the market.
Remember, the larger trend is still down as long as the market is still below 5330. With Nifty already near 5200, and significant overhead resistances ahead, the probability that this market will head much higher looks very low. At the same time, a significant decline also seems like a low probability before October 25th . Hence, we will pull a nuetral strategy on the market with the outer-perimeter in mind.
Nuetral Strategy- Bear Strangle:
Write n contract(s) Nov 24th 2011 5200 call at or near 45 and Simultaneously write n contract(s) Nov 24th 2011 4700 put at or near 136.
Margin Required: Aprrox Rs 32000/strangle
Credit Recieved: Aprrox Rs 177
As long as Nifty remains between 4523 and 5377 the strategy will make money.
At October expiry the strategy is likely to yield a profit of Rs 30/strangle – roughly 10% on the margin paid.