Nifty may trend down as market braces for a hawkish Monetary Policy Review

The Nifty appears set to trend down as the market braces for a hawkish Monetary Policy Review from the Reserve Bank of India (RBI). Geopolitical tension continues with high crude oil prices and an imminent trade war initiated by the USA. 

The Nifty has etched out three falling tops in succession though support is well above the index's 200-day moving average (200-DMA). The index hit a high of 10,929 on May 15. That was a falling top with respect to the all-time high of 11,170 in January. After bouncing from recent lows at the 10,420 level, the Nifty hit a high of 10,717 before correcting again. 

The support at 10,420 is well above the 200-DMA at around 10,325. The index would have to break that support and drop below the 200-DMA to confirm a full-scale downtrend. It could also range-trade the 10,400-10,900 zone for an indeterminate period. 

The VIX is not very high but it's rising. Many background signals are negative. The ratio of advances to declines is negative. Midcap and Small cap indices have lost far more ground than the Nifty. Volumes are higher on down trending sessions. FPIs (foreign portfolio investors) remain net sellers with high volumes. That's one reason why the rupee has slid. Retail investors have also sold. Domestic institutional investors are the only buyers at the moment. 

The Monetary Policy Review could have a bearish impact. The central bank may be nervous about rising inflation and a weak rupee. Banks raising savings interest rates indicate that the industry is expecting a hike. Rupee volatility would continue. A rate hike may trigger more selling of rupee debt by FPIs. Trend-following signals suggest staying long on dollar and long on the euro, too. 

The Bank Nifty has been hovering just above 26,000. A long June 28, 25,000p (105), long June 27,000c (145) strangle could be hit in four trending sessions in either direction. The cost of this position could be reduced with a short June 14, 25,000p (38), short June 14, 27,000c (70).

The Nifty is being held at around 10,605. A long June 10,800c (56), long June 10,400p (74) could be offset with a short 10,200p (37), short 11,000c (18). This long-short strangle combination costs 75 and it would pay a maximum of 125 if either 10,200 or 11,000 was struck in the June settlements. These strangles are zero-delta but the premiums are asymmetric.