11,450 key level for Nifty; investors may cut losses if market rises

The Nifty seems to have sustained itself above the support level of 11,500. But, it still appears to have several bearish characteristics. However, there are also some bullish signals. The advance-decline ratios are negative and there are high volumes associated with the selling. However, the VIX is down, which indicates traders aren’t fearful.  But mid-caps and small-caps have lost more ground than the large-caps in the F&O sector. 
 
The rupee remains stable. In many respects, the market is waiting for news flow. Apart from global developments, clarifications may be required about provisions mentioned in the Budget such as the impact of tax surcharge on FPI trusts. The corporate results for Q1 have just started coming in.  As of now, the FPIs are selling equity but buying into rupee debt.  Retail continues to be net negative since the Budget while the domestic institutions are net buyers.
 
Technically, the divergence between VIX and the indices could be resolved in two ways. The Nifty might bounce sharply or the VIX may spike as the monthly settlement approaches. Session volatility has eased after a big spike around the Budget.
 
By definition, this remains a big bull market but there’s been a retraction from the highs of 12,103 to around the 11,450-11,475-mark. There’s support in this zone. If the Nifty drops below 11,450, it could travel down to the 11,100-11,200 zone. That is critical since the 200-day moving average is trading in that zone. A fall below 11,100 would imply a new long-term bear market.
 

If there’s a bounceback, the index will face heavy resistance in the 11,800-11,900 range. Apart from technical congestion over the last year, this is the pre-Budget level and investors will cut their losses if the market rises.
 
The Bank Nifty lost more ground than the Nifty on Monday.  This has some bearish implications for the broader market. The Bank is at about 30,450 now. A strangle of July 25, long 31000c (85) and long 30000p (108) costs about 193. This can be offset by a short July 18, 30000p (35), short 31000c (20) to reduce net cost to about 138. The breakevens are 29,862, 31,138, assuming losses on shorts are offset by gains in long positions.
 
The Nifty is at 11,588. A bull spread of long July 25, 11700c (37), short 11800c (15) costs 22 with maximum gain of 78. A bear spread of long July 25, 11500p (53), short 11400p (27) costs 26, maximum gain of 74. The combined spreads have a net cost of 48, with breakevens at 11,452, 11,748.  For a strike, we need a movement of 150 in either direction. The average session high-low range (past 10 sessions) is 114.