Fall below 9,850 on Bank Nifty to push markets lower

 

The market continues to range-trade. The foreign institutional investors (FIIs) have been net buyers in the past five sessions but domestic institutions have turned net sellers. However, the net institutional position is moderately bullish in February. Retail sentiment has turned pessimistic. The breadth of the market is negative with declines outnumbering advances.

The Nifty has held above support at the 6,000 level in the past 10 sessions and tested resistance in the zone of 6,100. The release of various macro-economic numbers and the Interim Budget has not caused much shift in trend.

If the support at 5,950-5,975 breaks, the market could fall quite a distance. That is the zone where the 200-Day Moving Average (DMA) is located and a breach below the 200 DMA would put the long-term trend under pressure. On the upside, there's resistance at 50-point intervals. A breakout would need to go beyond 6,300 to look like a substantial move.

Corporate results have been more or less discounted. The global macro-economic situation is not likely to change too much right now. Given the lack of reaction to macro-economic data, or to the fall of the Delhi government, the market is waiting for stronger political cues.

As of now, the market is assuming a change in central government with the NDA taking charge. If the opinion polls, or other events seem to strengthen the NDA's position, the market will rise. If the NDA's position appears to weaken, the market could fall.

Technically speaking, the biggest danger remains the Bank Nifty. The financial index is way below its own 200 DMA. It is range trading between 10,100 and 10,400. If the Bank Nifty breaks down below support at 9,850-9,900, it would take the entire market down with it. Good news on the inflation front doesn't seem to have enthused investors in bank stocks, due to the rising NPA ratios of the PSU banks.

The rupee has held up well to the acceleration of the taper despite the FII sell off. There are some signs of pressure on the currency as end-of-month importers are looking to source the dollar. If the dollar gains, IT and to some extent, pharma will have to play the role of hedges. The CNXIT could be an outperformer on every dollar uptick. Since the dollar swaps of the oil-majors will be due for reversal soon, there could be more intense pressure on the currency in March and April.

The Nifty's put-call ratio (PCR) continues to look healthy at between 1.2 and 1.3. The bullish PCR could indicate that the market will hold onto support at 6,000 and keep testing 6,150-plus. The combination of tight range trading and a short settlement has also led to an enhanced expiry effect. Premia close to money are low.

The on-the-money straddle of long 6,100c (50) and long 6,100p (61) has breakevens at 6,211 and 5,990. The implied volatility is quite low, given the historic volatility of the index and even this “expensive straddle” is tempting.

Option traders should be prepared for a Nifty swing anywhere between 5,850 and 6,350 by settlement if there is a breakout from the range trading. The February bullspread at long 6,200c (16) and short 6,200c (4) costs 12 and pays a maximum of 88. The bearspread of long 6,000p (27) and short 5,900p (11) costs 16 and pays a maximum 84. The bearspread is slightly closer to money with the spot Nifty held at 6,075.

The bullspred and bearspread given above can be combined with long 6,200c, long 6,000p and short 5,900p, short 6,300c. This costs 28 and it pays a maximum of 72 with breakevens at 5,972, 6,228.