A correction in the market is imminent

The market hit a high of 6,222 on Monday before persistent selling pulled it back to 6,159.

Volumes ruled extremely high in both the cash and the F&O segments.

The pattern of a very strong foreign institutional investors buying that over-compensated for selling by the domestic institutions continued.

Incidentally, Indian operators and retail traders are also net sellers.

The major index has short-term support at the current level, then at the 6,050-6,075 level and below that, at roughly 50-point intervals.

On the upside, we have seen strong resistance between 6,150 and 6,225 on Monday. If the intermediate uptrend continues, that resistance will be tested again.

Sectorial action continues to cycle through various sectors. Right now, the CNXIT is under-performing the Nifty while the Bank Nifty has been a positive driver in the past couple of sessions.

Both CNXIT and the BankNifty have already hit new all time highs. In general, breadth signals are positive with good advance-decline ratios.

In this October settlement, the market could hit a new all time high (beating 6,357) and also start a long-overdue intermediate correction.

Beyond 6,357, calculating upsides is difficult because the market would be in an entirely new zone. But 6,357+ itself implies an upmove of a 200-plus points from the current levels.

The intermediate trend has been up for 18 weeks, which is far longer than normal. The chances of a correction in the next five-ten sessions is therefore, very

high.

Anecdotally, selling from the Indian players (DIIs and retail) also tends to accelerate during the festive season. Fibonacci calculations suggest a pullback of 5-7 per cent, implying a downswing of 300-400 Nifty points is possible.

The Nifty put-call ratio is in a normal-bullish range with the overall PCR (in terms of OI) being in the 1.2 zone.

The October PCR is around 1.35 with about 75 per cent of OI being in the current month.

However, we're just two sessions into a new settlement and premiums are uncomfortably high near the money.

Given expectations of a volatile settlement, it's possible for option traders to take spreads that are slightly far from money.

A long 6,200c (123) and a short 6,300c (77) costs 46 and offers a maximum payoff of 54, while a long 6,300c and short 6,400c (45) costs 32 and pays 68 max. A long 6,000p (69) and short 5,900p (47) costs 22 and pays a max 78, while a long 6,100p (99) and short 6,000p costs 30 and pays a max 70.

An interesting position would be a long call butterfly with a long 6,200c, two short 6,300c and a long 6,400c.

This costs a maximum of about 15, with breakevens at 6,215, 6,385. If the market moves between breakevens, the position has a maximum payoff at 6,300, where it is worth 85.