Market could see a sharp recovery this week

The market could see a sharp recovery this week. Monday opened strong and given only three sessions, the uptrend could sustain. What is more, there is a potential trigger since the Reserve Bank of India (RBI)'s next policy review is on April 7.

The 8-session downtrend tested support at around Nifty 8,275, by hitting a low of 8,269. This was about 10 per cent correction from the all-time high of 9,119 on March 4. This would count as an intermediate downtrend. It lasted over three weeks with a pattern of lower lows.

If the support at 8,275 holds, optimism about the RBI policy could lead to renewed enthusiasm for banking and financials. A rate cut right now looks very unlikely. But, hope springs eternal and the Bank Nifty is liable to remain up until April 7 at the least.  

If there is no rate cut, there could be another decline, or a stable consolidation. The Q4 result cycle will be starting. Optimism on that front could mean positive triggers for specific industries and stocks.

Technically, if the next low does not violate 8,269, we could hope for the next bounce to go a fair distance. There is congestion at every 50-point interval and that will mean many resistances. But if the long term trend stays up, the 9,119 mark should be tested.

The Foreign institutional investor (FII) attitude is positive. The European Central Bank's bond buying programme has pushed some Euro-denominated yields into negative territory and also ensured a flood of liquidity. The falling euro should hit dollar-parity or drop below dollar, if the $1.05 level breaks. Long-term currency trends indicate that the rupee will probably continue to strengthen against euro. Against the dollar, the rupee has good support at the 63 level. Traders may look at long USDINR, short EURINR positions.  

The Bank Nifty dropped sharply to 17,700 and it has now bounced sharply to pull back above 18,350. Optimism could push it up somewhat further. Traders could consider a bullspread of long 19,000c (227), short 19,500c (105). This costs 122 and it could pay a maximum of 378. Even if it is not struck, an uptrend on the financials would boost the premiums.  

The implied volatility remains high. The 200-Day Moving Average is in the zone 8,050-8,100 and the last intermediate correction saw support come in at 7,950-8,000. A move below 8,000 would indicate a potentially big bear market. If the policy is hawkish, or Q4 results are poor, or perhaps both, the market might nosedive next week.

The Nifty put-call ratios are neutral. Both the three-month and one-month  PCRs are at around 0.99. However, this is early into a new settlement and PCRs are not necessarily great indicators. The April Call chain has open interest (OI) peaking at 9,000c, with bulges at 8,500c, 8,600c. The April Put OI is ample between 8,000p and 8,600p with peaks at 8,000p and 8,600p. The Nifty could move 100-plus points in any given session.

The index was held at 8,492 with the futures at 8,570. The April Call chain is 8,500c (162), 8,600c (108), 8,700c (67), 8,800c (38), 8,900c  (22) 9,000c (11). The Put chain is 8,500p (107), 8,400p (75), 8,300p (51), etc. Obviously the calls near the money are overpriced in comparison to the puts. Since it's early in the settlement, the trader can afford wide positions.  

A bullspread of long April 8,700c, short 8,800c, costs 28, with a maximum payoff of 72. This is 200 points from money. A CTM bearspread of long 8,400p, short 8,300p costs 24 and pays 76. The bearspread is only 100 points from money. The premium asymmetry makes strangles and straddles unattractive.