Nifty
could test 7,850 levels
The
market went into a sharp downtrend. Weak domestic macroeconomic data coincided
with global currency uncertainty and a statement from the Reserve Bank of India
(RBI) Governor ruled out a rate cut in the next policy review. The settlement
next week is likely to see high volatility.
The
indices hit highs on September 8, with the Nifty touching 8,180. Since then,
it's been a slide. The by-election results will hurt the Bharatiya Janata Party
(BJP). Retail sentiment has gone negative, leading to weak advance-decline
ratios. Volumes have dipped with major indices. The net institutional attitude
has been negative in five-six sessions with both domestic institutions and
foreign institutional investors (FIIs) being sellers.
The
market has moved up so much since the May 16 general election results (when it
was at Nifty 7,200) that calculating possible retracement levels is difficult.
The 200-day moving average is way below at 6,865. The Nifty had moved up 650
points between its most recent low of 7,540 in mid-August and its all-time high
of 8,180.
Fibonacci
calculations suggest it could land at support around 7,940 (where it is), or
fall till 7,850, 7,775 or 7,700. Below 7,700, there would be worries about the
intermediate trend and the long-term trend may come into question.
The
Bank Nifty remains a key driver and it could lose more ground than the overall
market. The RBI Governor's recent statements ruling out possible rate cuts will
add to the pressure on bank stocks. The Bank Nifty could find support in the
15,700 zone. If the index drops below 15,600, it could slide till 15,000.
The
dollar has risen above Rs 61 and could run up further if FII selling continues.
There will be some end-of-month currency pressure as the oil majors run up
their import bills too. A long dollar-rupee seems reasonable. Defensive sectors
could come into play if the rupee loses ground.
Settlement
comes up next week and expiry effects are visible with option premia having
dropped far from money. There is a good chance this is a mispricing by the
market. The Nifty could easily see a move of three-four per cent in seven
sessions and that would be 250 points away from current levels.
I
will be tempted to go wide and buy options distant from money though the
close-to-money spreads are also offering decent risk-reward ratios. The Nifty's
put-call ratio (PCR) is at 0.9 for the September series and that's bearish. The
PCR is above one - neutral territory for the three-month set.
The
Nifty Call chain has massive open interest (OI) at September 8,200c, which
would be likely upper limit on a bounce. The Put chain has a lot of OI down
till 7,500. The spot Nifty index closed at 7,933, with the futures at 7,956.
A
close-to-money bullspread of long Sep 8,000c (44) and short 8,100c (17) costs
27 and pays a maximum of 73. A CTM bearspread of long Sep 7,900p (38) and short
7,800p (15) costs 23 and has a maximum payoff of 77.
A
wider bullspread of long 8,100c (17) and short 8,200c (7) costs 10 and pays a
maximum 90 while a long 7,800p (15) and short 7,700p (6) costs nine and pays a
maximum 91. Combining these two wider spreads, we get a long 7,800p, long
8,100c, short 7,700p and short 8,200c. This costs a maximum 20 with a maximum
payoff of 80, with break-evens at 7,780 and 8,120.