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Big resistance at current Nifty zone of 7,500-7,650

Devangshu Datta 

The uptrend continues, due to stronger global sentiment. However, the momentum has slowed considerably. Nevertheless, the Nifty has seen an uptrend of over 10 per cent since the Budget. Breadth has been good and there's been high volumes. Domestic institutions sold into the rally but foreign institutional investors (FIIs) have been big buyers. The rupee has gained substantially due to inflows.

This week will see policy meets of the Federal Reserve and the Bank of Japan (BoJ). Last week saw the European Central Bank (ECB) policy meet with Mario Draghi ruling out further cuts while remaining committed to the ECB's Quantitative Easing (QE) programme. The BoJ is also expected to stand pat rather than tinker with rates again. The Fed may also maintain status quo but any advisories that threatens to raise US rates would scare traders.

This could mean rupee volatility (along with volatility in every other currency). Expectations that the Reserve Bank of India (RBI) will cut the policy rate soon are also pushing the rupee as well as the equity market. Incidentally the FIIs have been selling rupee debt holdings, which implies that they don't expect a major rate cut or they think it has already been factored into bond yields.

Despite the big up move, we can't confirm the major trend has turned around, although the intermediate trend is obviously up. The market slid 2,300 points or roughly 25 per cent in the 11-month bear market between its all-time high of 9,120 in March 2015 and its low of 6,825 on Budget Day. The 200-day moving average (DMA) is trending at around 7,900, well above the current levels. There is big resistance at the current zone of 7,500-7,650. This has not been overcome.

Big resistance at current Nifty zone of 7,500-7,650
On the downside, the low to beat is now 6,825 (February 29 low). A move beyond 7600, ideally closing values above 7,600 would set up higher highs and be very encouraging. If the bounce goes beyond 7,600, a run till 7,850 is possible. Above 7,900, the trend would challenge the 200 DMA and a move above the 200 DMA would be a very positive signal.

The Nifty Bank has run stronger than the overall market since it is even more rate-sensitive. The Nifty Bank has been testing resistance at 15,400 on intra-day basis but it has not yet broken out past the 15,300 zone. A long Bank strangle with long Mar 15,000p (181), long Mar 16,000c (85) is not zero-delta since the index is held around 15,300. But it may be worth taking since March will continue to be volatile. Two or three trending sessions could put this spread into profit with breakevens at about 14,725, 16,275.

The Nifty call option chain for March has ample open interest (OI) between 7,000c and 8,000c with big peaks at 7,500c, 7,600c, 7,700c and 7,800c. The March put option chain has major OI peaks at 7,300p, 7,200p, 7,000p and high OI until 6,600p. The Nifty's put-call ratios are now looking healthy at above 1.

The Nifty closed at 7,538 on Monday. The expiry effect has reduced close to money premiums though there are two weeks to go. The bullspread of long March 7,600c (71) short 7,700c (36) costs 35 and pays a maximum 65 at about 65 points from money. The bearspread of long 7,500p (78), short 7,400p (48) is also acceptable with a cost of 30 and a maximum return of 70. This is at about 40 points from money.

A long-short strangle set combining these options, (long 7,500p, long 7,600c, short 7,400p, short 7,700c) costs 65 however, and pays only 35. Nor is it zero delta. It would be better to take a view: Either go with the trend or wait for a clear signal of a breakdown.

First Published: Mon, March 14 2016. 22:41 IST