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Long-term trend bearish

The Federal Reserve decided to hold dollar rates unchanged but the ensuing relief rally was truncated since the market interpreted the statement as pessimistic

Devangshu Datta  |  New Delhi 

The settlement takes place in a truncated week and it could be volatile. Overall, the global sentiment is downbeat but India is riding on hopes of a possible rate cut at the Reserve Bank of India's (RBI's) review next Tuesday.

The Federal Reserve decided to hold dollar rates unchanged but the ensuing relief rally was truncated since the market interpreted the statement as pessimistic. Consensus expectation is that RBI will cut and there is indeed a strong case for cutting. But, RBI might decide the timing is not right. Inflation is down but the monsoon failure could mean a spike in food prices and so, RBI might decide to hold a little longer.

Friday is Eid and next Friday is Gandhi Jayanti. This means volatility will be packed into fewer sessions. Although markets have managed to hold onto support above 7,750, the long-term trend looks bearish. The Nifty and Sensex are both well below their respective 200-Day Moving Averages (200-DMA).

To break a pattern of lower lows, the Nifty must stay above 7,540, the latest 52-week low, which was hit on September 8. It should ideally climb past the 200-DMA, which is at about 8,200 (Exponential) and 8,400 (Simple). Volatility expectations are high. So are option premiums.

The global scenario is volatile. China continues to look weak.

The previous bull market lasted 40-months. There is a Fibonacci retracement level at Nifty 7,400, which would be a 37 per cent correction of the last bull run from 4,531 (December 2011) to a high of 9,119 (March 2015). The next Fibonacci retracement levels of 6,800-7,000 may also be important. That's where the market was, before the Bharatiya Janata Party came to power in May 2014.

Long-term trend bearish
Foreign institutional investors sold heavily through the September settlement. However, domestic institutions have been strong net buyers. The rupee remains under pressure but the Fed inaction has led to some recovery versus the dollar, with the rupee climbing back to just above 66. The forex market is liable to stay very volatile. Every emerging market currency is seeking lower lows versus the dollar and the information technology and pharmaceutical stocks would be potential hedges.

The Bank Nifty is, as always, high-beta versus Nifty and there will be a strong focus on financial scrips, until the RBI meet at the least. The Bank Nifty almost slid till 16,000. It has pulled back above 17,200 on hopes of a rate cut.

A long strangle of long 16,500p (232) and long 18,000c (262) costs almost 500, with the index at 17,250. This is expensive but it may gain handsomely if there is volatility through October. Two or three trending sessions would be enough to strike one end of this strangle. But, the brave trader might consider selling this, or a wider position, if he thinks volatility will not spike that much.

The Nifty's put-call ratios (PCR) are neutral at about 1.01 though this is not so reliable close to settlement. The call chain for October has peaks at 8,000c, 8,200c, 8300c with good open interest till 9000c. The October put chain has big open interest (OI) peaks at 7,800p, 7,500p and 7,4000p, with high OI at every strike down to 7,000p. Premiums are high but spreads are reasonable.

The Nifty traded at 7,846 on Wednesday. A bullspread of long October 8,100c (85), short 8,200c (57) costs 28 and pays 72 and it's 155 points from spot. A bearspread of long October 7,700p (118), short 7,600p (92) costs 26 and pays a maximum 74 and this is 145 points from spot. These spreads could be combined but the risk:reward ratio is adverse.

First Published: Wed, September 23 2015. 22:39 IST