)
The market has collapsed into a steep downtrend, breaking successive supports in the last two sessions. It tested support at 5,360 on Monday and if that breaks, it could drop till 5,200 or lower. On the upside, bounces will hit resistance at 5,475 and again at 5,565.
Monday ended with negative technical signals and heavy losses. The intermediate and long-term trend are down, so is the short-term trend. The government will have to reverse some recent policy decisions with respect to capital controls and the liquidity squeeze if it wants a fast revival of sentiment.
Breadth was poor, with the overall market doing worse than the major indices. Volumes were fairly high, a danger signal on downtrending sessions. The dollar has swung to a new high versus the rupee and, though the rupee could be shored up temporarily, this trend looks set to see the dollar move higher.
The Nifty futures ended in backwardation to spot and so did the Bank Nifty futures. These are negative signals. It is still relatively early in the settlement. The dollar-rupee broke support below 62 and even a partial recovery is likely to terminate in the 61.50-61.75 zone.
The FIIs have been net sellers but not in very large volumes. The panic exits have come from Indian operators and retail traders afraid of further liquidity squeezes and possible capital controls. Indian bond yields have also gone through the roof and banks have started raising interest rates. Our recommendation of a Bank Nifty bearspread of long 10,000p and short 9,500p has been fully realised with the financial index sold down to a new 52-week low at 9100. One suggestion would be to move to a new bearspread of long 9,500p (422) and short 9,000p (361). This costs 61 and it's well into the black. This could realise 438-plus if the Bank Nifty moves below 9,000. Individual banks are also hitting 52-week lows and short futures positions on these stocks are also tempting.
The Nifty has seen lower lows with a new 2013 low of 5,360. Support here is critical. If it breaks, a rapid fall till 5,150-5,200 is likely. The major index could hit resistance at 5,475 (the previous 2013 low) or 5,565.
This is certainly a new long term bear market, which means that prices could drop a long way from here. The peak was at 6,200-plus - and Indian bear markets normally see 35-40 per cent corrections from the peak, occurring over periods ranging from six months to several years. So far, it's been a 14 per cent correction.
Volatility is likely to stay high through the rest of the August settlement. In this settlement, the market should stay within reach of Nifty 5,230-5,570. This are roughly the breakevens on the long 5,400c (91) and the long 5,400p (78) straddle. The put-call ratio is in the negative zone at 0.85-0.9.
Expiry effects are showing. A bullspread of long 5,500c (47) and short 5,600c (22) has a reasonable risk:reward ratio, with a maximum payoff of 75 and a cost of 25. A bearspread of long 5,300p (44) and short 5,200p (24) costs 20 and could pay 80. Both are zero-delta with the spot index at 5,415. Strangles combining these positions cost 45 and pay a maximum of 55 each way with breakevens at 5,255, 5,545. Both sides of this position may be struck so, if you fancy your trading skills, the strangle is tempting.
