Expect range trading till RBI policy

The market heads into settlement with the major indices close to all-time highs. The trading pattern of the past few sessions indicates ranged trading is likely through settlement and until the RBI policy. The breadth and volume signals are mildly negative. Declines have outnumbered advances. Volumes are slightly down. Retail sentiment is a little bearish. Domestic institutions are net sellers, while foreign institutional investors (FIIs) remain net buyers. Quite a lot of small caps and mid-caps are net losers since the Budget.

The upside levels to watch are the all-time highs at Nifty 7,840-plus. If the market hits new all-time highs, it would obviously indicate strongly bullish sentiment in big stocks. On the downside, the support at 7,425-7,450 held in the last sell off. A drop below 7,400 would be bearish. If 7,400 breaks, the market could fall till 7,200.

Trends over the next ten sessions would be driven by a combination of first quarter (Q1) results, India-specific macro-economic data, RBI policy and geopolitical considerations. The Q1 results are reasonable but not extraordinary so far.

Continued fighting in the West Asia could impact crude prices at any stage. That could trigger a sell-off in Indian equity. Coupled to a sub-par monsoon, this could push inflation. These considerations will influence the RBI in the policy review next week. The June data suggests inflation is slowing. But the consensus is that the RBI is liable to hold rates at status quo rather than cut. The central bank is likely to wait for monsoon outcomes to become clearer.

The market may range through settlement and until the policy review. If the RBI does cut rates, it will be a bullish trigger. A rate hike is very unlikely but it would be bearish if it did happen. Status quo would not move the market much but it would be mildly bearish for a session or two as optimists cut their losses.

Obviously, the Bank Nifty would be a key driver if a trend develops. The financial index could move between 14,900 and 15,600. After the review, it may climb sharply and hit all time highs above 15,750, if there's a rate cut. Otherwise, it's liable to settle at the lower end of that 14,900-15,500 zone. If the rupee stays inside the 59-61 zone versus the dollar, it will not be a big influence on the market. But any weakness could lead to hedging into IT stocks. If crude rises, rupee weakness is a possible outcome.

The Nifty's put-call ratio (PCR) looks healthy with July PCR and the three-month PCR both hitting 1.2 levels. This is close to settlement and OPCR can have distortions at this stage. The VIX has dropped, which is a sign of lack of fear.

There is ample open interest in the July 8,500c though the call OI peaks at Aug 8000c. In the puts, there is OI down to Aug 6,500p but the peak is at 7,000p with another big bulge at 7,300p. The August carryover has been reasonable. August option chains have similar OI patterns. Traders are quite prepared for a run till 8,500 or a sell off down till 7,200.

The index is at 7,787. An August bullspread of long 7,900c (77) and short 8,000c (44) costs 33 and maximum payoff is 67. An August bearspread of long 7,700p (64) and short 7,600p (41) costs 23 and has a possible payoff of 77. If these two spreads are combined, the resulting long-short strangle 57 and the maximum return is 43 with breakevens at 7,643, 7,957.