Support till 9,250 for the Nifty

The market climbed to the highs of Nifty 9,532 before it saw a small reaction. Going into settlement day, the indices are sitting pretty much where they were, a month ago. Cross-border tensions, worries about the Trump tax plan, etc, have all conspired to trigger some selling. Overall, May settlement has seen reduced volumes from institutions. There has been a little net FII selling and net domestic institutional buying. Retail has also stayed positive until the past couple of sessions. Midcap selling suggests that retail is also nervous. India-specific events still look favourable with reasonable corporate results and a continued thrust on reforms. The GST is now being examined in detail.

The Nifty climbed past 9,500 and hit a new record high at 9,532 on May 17. The index has since eased below 9,400 but support has held at around 9,350. Below, there's support at every 50 points or so, until 9,250. The next strong support below 9,250 is at 9,100-9,125. On the upside, there will be selling anywhere above 9,450. Reduced volumes implies that even one high volume session could move the index a long way in either direction.

The VIX has seen a little uptick, which could mean some nervousness. The put-call ratios (PCRs) are above 1 indicating a mildly bullish market. But, PCRs are not reliable indicators close to settlement. The advance-decline ratio is in neutral or negative territory. The dollar has appreciated to a zone of 64.70-65. Consider staying long dollar on purely technical grounds.

The index started moving north in late December from 7,900 levels. It gained over 20 per cent before the recent correction. If this is an intermediate correction, it could last 4 weeks or more. A dip till 8,800 could be on the cards if there's a full-blown intermediate downtrend.  The global attitude still seems strongly pro-emerging market and EU stocks are also doing ok. The US seems to have gone a little off the boil. IT sector and pharma stocks have seen selling. Energy stocks, especially PSUs have seen strong buying.  

The Nifty Bank hit higher highs, with the new record being 22,978. It has corrected till 22,540. A strangle of long June 29, 23,000c (171), long June 29, 22,000p (225) is slightly asymmetric with the put slightly further from money. There is a downside bias since the put premium is higher.

Either side of this strangle would be crossed, given two big trending sessions in June. The cost can be offset slightly by selling June 1, 22,000p (68), short June 1, 23,000c (24). If either short position is struck, the corresponding long position will gain in value. The put premium is seriously higher, indicating short-term bearish expectations. The June Nifty call chain has peak open interest (OI) at 9,500c, and high OI at every strike until 10,000c. The June put chain has very high OI at every strike down to 8,000p with peaks at 9,200p, 9000p, 8800p and 8500p. 

The Nifty is at about 9,360. A long June 9,500c (58), short 9,600c (29) costs 29 and pays a maximum of 71. This is 140 points from money. A long June 9,200p (65), short May 9,100p (45) costs 20, pays a maximum of 80 and is 160 points off the money. These two spreads can be combined for a long-short set of strangles which are almost zero-delta. This set costs 49, and pays 51, with breakevens at 9,549, 9,251. One side or the other of this strangle set is more or less bound to be hit in the new settlement.

Trend following systems would suggest staying long in the Nifty futures. But, the index is now close to the suggested trailing stop at about 9,270-9,300 points. If the index drops below that, the negative advance-declines ratio, and high volumes in sales would indicate going short.