Breakouts past 7,850 new positive signal

The market stabilised on Monday after nervousness about the Ukraine crisis receded slightly. However, that situation remains a cause for concern. On the domestic front, the RBI maintained status quo. FIIs were net sellers through the last fortnight while domestic institutions were net buyers.

The RBI action was in line with consensus expectations and quickly discounted. The RBI sounded several notes of caution. The central bank's overall projections remain unchanged. It appears that the RBI will wait for monsoon outcomes and also to see how much momentum the new government can create in rebooting stalled infra projects.

The overall breadth and volume signals are mildly negative. Declines have outnumbered advances over the past week. Direct retail investors have been exiting but there is retail cash flowing into the stock market through the equity mutual fund route where assets under management have risen.

The upside levels to watch would be the all-time highs at Nifty 7,840-plus. While the market obviously has a bullish long-term trend, breakouts past 7,850 would be a new positive signal on that front. In the short term, the index may face resistance at 50-point intervals between 7,650 and 7,850 if it rises.

On the downside, support in the 7,550 zone was tested in last week's correction and that held. If the support at 7,500 breaks, then 7,425-7,450 could be tested. A drop below 7,400 would be bearish. If 7,400 breaks, the market could fall till 7,200.

The BankNifty remains a key driver for any sort of sustained trend. The financial index has dipped below 14,900, finding support at 14,820. If support at those levels hold, the index could bounce back all the way till 15,500-plus in the next intermediate uptrend. If support at 14,750-14,800 breaks, a slide till 14,200 is possible.

The rupee has seen some pressure, both from FII selling and from dollar demand from PSUs, which are importing crude. A weaker rupee looks likely and so does an oscillation between 59-61. If crude rises, rupee weakness with the currency dropping below 61 and testing of support at 63 is a possible outcome. Any weakness could lead to hedging into IT stocks and perhaps, into pharma.

The Nifty's put-call ratios have dropped into bearish zones. The August PCR and the 3-month PCR are both below 0.95 levels. The VIX has dropped, which is a sign of a lack of fear but relatively low premiums imply the market is under-estimating the potential for a big move.

Traders are prepared for a run till 8,500 or a selloff down till 7,300 if we examine the option chains. There is ample open interest in the August 8,500c and even at 9,000c though the call OI peaks at Aug 8,000c. In the puts, there is OI down to Aug 6,500p but the peak OI is clustered across the range of 7,300p to 7,600p.

The spot Nifty index is at 7,625 with the futures at 7,645. An close-to-money bullspread of long Aug 7,700c (58) and short 7,800c (27) costs 31 and maximum payoff is 69. A CTM bearspread of long Aug 7,600p (69) and short 7,500p (38) costs 31 and also has a possible payoff of 69. Both these are acceptable risk-reward ratio and there is a fair chance both these spreads could be hit.

A trader who wishes to take non-directional action, hoping for a big move could look for wide strangles. A long 7,500p and long 7,800c can be offset with a short 7,400p (20) and short 7,900c (12). the resulting position costs 33 and it has breakevens at 7,467 and 7,833.