Nifty may fall to 7,200-7,250 before finding support

Continued selling in Shanghai translated into selling pressure on other bourses including India. Currencies such as the rupee also came under pressure as foreign institutional investors (FIIs) sold heavily. The first few sessions of the new year have seen the Nifty fall by nearly five per cent. It's likely the downtrend will continue given that a new 52-week low was registered on Monday.

The Nifty topped out at 7,972 on January 1, a peak well below the index's 200-Day Moving Average (around 8,160 at present). On the downside, the latest low is 7,494, which was hit on January 11. This breakdown implies a fall till around 7,200-7,250 before the Nifty hits reliable support.

The global mood remains quite nervous. The drop in crude prices (and associated energy commodities) means threats of deflation. Projections of growth are being pared everywhere, including India. The yuan is being hit by selling pressure and so is the yen, rupee may in fact, be comparatively stronger versus the dollar.

FIIs have been sellers of rupee equity in January and of equity and debt through November and December as well. Retail investors remain net positive, albeit with reduced volumes. Domestic Institutions are also net positive.

There is a chance that the market will recover quickly if the lower prices lead to bargain-hunting. Also, the government may be able to get some positive traction going in terms of good sentiment about the upcoming the Budget. A bounce back till the 7,950 levels is possible. However, the Q3 corporate results will also matter and so will inflation and IIP data. That newsflow is due to start now with information technology sector biggies among the first to declare results.

The Nifty Bank Index looks quite bearish though it has not hit new 52-week lows to coincide with the Nifty. The PSU banks are under very heavy selling pressure, as is Axis Bank. The PSU banks don't have much weightage in the Nifty Bank index but they are hitting a succession of new lows and poor sentiment in that segment could pull down the entire sector.

The option trader may consider holding a Nifty Bank bearspread of long 16,000p (283) and short 15,000p (50). This was recommended last week at a cost of 112, with the index trading at around 16,600. It is on the money now with the index at 16,016 and the current cost of the position is 233. There are strong prospects of further profits.

The Nifty's put-call ratios remain bearish, hovering at around 0.85. The call chain for January has ample open interest (OI) between 7,800c and 8,500c, with a big peak at 8,000c, and lower peaks at 8,200c, 8,500c. The January put chain has big OI peaks at 7,500p (in the money) and 7,300p and excellent OI till 7,000p.

Option premiums are rising now, along with the volatility. There is plenty of time to expiry. So, the trader could consider wide positions. The Nifty traded at 7,564 on Monday with the futures premium at about 30. A bullspread of long 7,700c (58), short 7,800c (30) would cost 28 and pay a maximum of 72, this is about 135 points from spot. A bearspread of long 7,400p (55), short 7,300c (37) costs 18 with a maximum payoff of 82 and this is about 165 points from spot. Both spreads could be combined for a set of long-short strangles which is almost zero-delta. That strangle set would cost 46, with a possible pay off of 54. Most traders will probably continue to favour the short side but a short-term bounce may be on the cards.