Correction on, Nifty could fall to 8,250-8,300

The market is in correction mode. Despite the positive surprise of an unexpected rate cut by the Reserve Bank of India (RBI), indices have tumbled. One, global fear is of a hard Brexit landing and another, of an dollar rate hike in December. Yields have risen in global bond markets and the pound has crashed. In India, earnings season kicked off with a cut in 2017 advisories from bellwether Infosys. One ray of comfort is that the unpredictable US election now seems to be tilting in the direction of the preferred candidate, Mrs Clinton.

This was the first policy review led by Urjit Patel and the first where the new Monetary Policy Committee (MPC) calls the shots. The MPC unanimously opted for a policy rate cut. Market watchers are eagerly waiting for the minutes.

The Nifty broke critical support at 8,550 after testing that level several times. There is support at every 50-points or so in this heavily traded zone but the index could have a downside target of 8,250-8,300. If it does bounce back, it could test resistance at 8,750 again.

As of now, the index has a pattern of lower lows. The previous low was 8,689 and it hit 8,506 on Monday. This has bearish implications. Tentatively, the intermediate and short-term trends seem bearish, while the long-term trend must be accounted up. On the upside, the index would have to move above 8,970 to create a pattern of higher highs and confirm the bullish trend that has been in force since March 2016.

The rupee could become a target if there are any missteps as $26 billion of dollar-rupee FCNR swaps are being reversed. Government bond yields have stayed low, partly on RBI's Open Market Operations (it is swapping dollar and buying bonds to release the rupee received back into circulation). However, the FIIs have been selling rupee debt in the secondary market. This could be just a booking of capital gains since the FIIs remain moderate net buyers of equity in October. Domestic investors are net buyers. Retail also remains positive.

The Nifty Bank remains high-beta. It hit a new all-time high at 20,575 on September 7 and it has subsequently hit a recent low of 18,825, on October 13. That is a retraction of 8.5 per cent from the peak - much more than the concurrent five per cent correction of the Nifty.

 

As of now, the Nifty Bank is at around 19,050. A long Nifty Bank October 27, 19,400c (97), long October 27, 18,600c (89) costs 186. Either end of this long strangle could be struck before settlement, given just one big session in either direction in October settlement. Traders could also sell the October 20, 18,600p (36) and the October 20, 19,400c (30). This would cut the cost of the long strangle and if it's struck, the long strangle would automatically rise in value.

The Nifty call chain has a huge spike in open interest (OI) at 9,000c with big OI at 9,200c and 9,500c and it has good OI till 10,000c. The put chain has maximum OI at 8,600p, with another big bulge in OI at 8,000p. The put-call ratios are at very bearish values of 0.85 or less. This may indicate more bearishness.

The Nifty is at 8,520. A bullspread with long October 8,600 (47), short 8,700c (19) costs 28 and pays a maximum 72. This position is about 80 points from money. A bearspread with long October 8,500p (72), short 8,400p (42) costs 30 and pays a maximum 70. This is only 20 points from money. So, it looks more attractive.