Nifty testing support at 8,650

The market trend was indeterminate and uncertain through the past week. There were sell offs on the fears that the US Federal Reserve would raise rates earlier than anticipated. The European Central Bank has started its own Quantitative Expansion plan and that has also led to some turmoil in currency markets.

Technically, there was profit-booking in an overbought market. It seems major players will wait for some news triggers before making fresh commitments. The FII attitude has been net negative in the past five sessions and the rupee is under pressure against the dollar. Domestic institutions have been net sellers through March.

The Nifty broke a sequence of successive supports. It is currently testing support at 8,650 (futures). This zone has been extensively traded and there is support/ resistance at every 50-point distance. So, if 8,650 breaks, 8,600 might hold. Similarly there will be resistance at 8,700, 8,750, etc.

There have been net losses since the Budget. Expiry considerations are also in play with settlement due on March 26. The Bank Nifty has dropped more sharply and it is now below 19,000. Traders are not expecting any more rate cuts from the Reserve Bank of India, given slightly higher CPI numbers for February. The Nifty peaked at a new high of 9,119 post-Budget. Other broad indices such as the midcaps and smallcaps also hit new highs. So, the big long-term trend should still be bullish by definition.

Implied volatility remains high. The rupee has lost ground against the dollar, though it is holding above support at 63. A fall below 63 towards the month-end could occur if the oil PSUs make their usual crude purchases. The euro has retreated against most currencies including the rupee. So, traders might look at long USDINR, short EURINR pairs. The IT and Pharma stocks could provide hedges if the rupee dips versus the dollar.

A break below 8,700 implies the short-term correction could turn into an intermediate downtrend. 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 that 8,000 level would indicate potential trend reversal in the long-term bull market.

Potential news factors include the Fed action or statements. It does not seem that ordinances will pass through the Rajya Sabha in the Budget Session but that bearish impact has been discounted. The Bank Nifty behaviour is crucial. The BN bounced from a support of 18,225 before the Budget. It moved above 20,000 before it crashed to 18,750. Given its high weight in the Nifty -Sensex, it could drag things down.

The Nifty put-call ratio are slightly bearish. Both the three-month and one-month PCRs are below one. The March Nifty Call chain has open interest peaking at 9,000c, with bulges at 9,100c, 9,200c, and 9,500c. The March Put OI is ample between 8,000p and 9,000p with large peaks at 8,000p, 8,400p, 8,500p, and 8,800p. The Nifty could move 200-plus points in any given session.

The index is held at 8,633 with the futures at 8,670. The March Call chain is 8,700c (73) , 8,800c (37), 8,900c (17), 9,000c (7). The Put chain is 8,600p (64), 8,500p (36), 8,400p (19), etc. The near-to-money bullspread of long 8,700c, short 8,800c, costs 36, with a maximum payoff of 64. A CTM bearspread of long 8,600p, short 8,500p costs 28 and pays 72.

Both CTM spreads are at acceptable ratios. A trader seeking two-way cover could take a long 8,500p, long 8,800c, short 8,400p, short 8,900c. This offers a maximum return of 63, with a cost of 37 and breakevens at about 8,837, 8,463.