Drop below 8,200 a negative signal

The market climbed ahead of the Reserve Bank of India (RBI) policy review. But the rise was not driven by financials, since the bank Nifty suffered losses on Monday. The consensus is that rate cuts are unlikely. But an optimistic statement by the RBI governor could still have a bullish effect.

As things stand, the market has pulled up above 8,650 from a recent low of 8,269. The 200- Day Moving Average is trending at about 8,200. So, a nine per cent correction from 9,119 to 8,269, was followed by a four per cent recovery. It is not clear if the intermediate down-trend that started from the peak of 9,119 on March 4 has ended.

A rate cut looks very unlikely. The two prior cuts of January and early March have not yet been transmitted through the banking system. The Bank of England and the Bank of Japan are both due to come up with policy reviews this week. In addition, recent US employment numbers were weak. German and French macro-economic data are also expected.

RBI would probably hold status quo and wait for information on all fronts. If there is no rate cut, there could be another decline for Indian equities, or perhaps, stable consolidation. The Q4 result cycle will soon be starting and that will provide triggers.

Technically, we hope this bounce may go a fair distance if it does not abort on a hawkish RBI stance. While there is congestion at every 50-point interval, a big bull market could test the 9119 mark.

The FII attitude remains positive. The European Central Bank's bond buying programme has ensured ample liquidity. The Bank of Japan stance and the Bank of England stance could lead to trends developing in currency markets. The yen and euro are expected to continue weakening. The euro is expected to hit dollar-parity or drop below dollar, if the $1.05 support level breaks. Against the dollar, the rupee has good support at the 63 level. Traders may look at long dollar rupee, short yen-rupee positions. The Bank Nifty dropped sharply to 17,700 and it has now bounced back above 18,600. Optimism could push it beyond 19,500, if the RBI says what the market wants to hear. Traders could consider a strangle of long 19,000c (263), short 19,500c (119), long 18,000p (169), short 17,500p (78). This costs a net 235 and it could pay a maximum of 265. It will work if the financial sector remains volatile.

The implied volatility is high. If RBI policy is hawkish, or Q4 results are poor, or both, the market might nosedive. A drop below 8,200 would be a negative signal and a dip below 7,960 would be very bearish.

The Nifty put-call ratios have moved into bullish territory which is a positive signal. Both the 3-month and one-month PCRs are at around 1.1. The April Call chain has open interest peaking at 9,000c, with another big bulge at 8,800c. The April Put OI is ample between 8,000p and 8,600p with peaks at 8,000p and 8,400p.

The index was held at 8,660 with the futures at 8,692. The April Call chain is 8,700c (110), 8,800c (66), 8,900c (36) 9,000c (18). The Put chain is 8,600p (82.3), 8,500p (56), 8,400p (38), 8,300p (26), etc. Calls near the money appear overpriced compared to the puts.

A bullspread of long April 8,800c, Short 8,900c costs 30, with a maximum payoff of 70. This is 140 points from money. A bearspread of long 85,00p, short 8,400p costs 18 and pays 82. The bearspread is 160 points from money. Premium asymmetry makes Nifty strangles less attractive and a focus on the Bank Nifty might be better than two-way Nifty positions.