Will Nifty recover on Monday?

The biggest intra day fall on the benchmark indices in over 2 years has meaningfully dented the optimistic sentiment. The only saving grace is that the monthly lows of 5477 (Nifty) and 18144 ( Sensex) are yet not breached. Technically speaking, the market is poised at a very crucial juncture. A simple trend line drawn by joining the weekly closing of Dec 30, 2011, and June 1, 2012 (line chart, log scale), indicates that 5500 to 5450 is a significant support zone for the index. 

A fall and weekly closing below this support band would mean that the eventual price action would be similar to that of Sept-October 2008. On the contrary, holding this support band would imply that the bulls are likely to make one more attempt to move towards 5800-5880 levels. The RSI momentum oscillator is presently showing "positive divergence" and the weekly "stochastic oscillator" is in the oversold territory. 

Both these technical tools indicate that in the shorter term, a bounce/relief rally is in the offing. However, it must be remembered that the longer the market lingers near this support band of 5500 to 5450, this higher are the chances of a breakdown. Traders who are willing to take risk are advised to buy into the 5700 call option for the September series at a premium of around Rs 60 to Rs 70 per lot. One should note that the entire capital allocated for this trade (approximately Rs 3500 per lot) would be at risk as there is no stop loss in this strategy. Also as a trader, the maximum loss in a single trade should not exceed 2% of the total net worth of the trader. The target premium of the 5700 call would be near to Rs 200.