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A sharp correction in financials drove the market down in the past couple of sessions after the long weekend. This was despite a surprise rate cut by the Reserve Bank of India (RBI). The proximate cause was, supposedly, fear that the US Federal Reserve would raise rates earlier than anticipated. The technical reason was profit-booking in an overbought market.
The Nifty dropped about two per cent on Monday. It is back in the 8,700-8,750 support zone, tested on Budget Day. The Bank Nifty dropped more sharply and is testing support at 19,200-19,250. The Nifty and Sensex have hit record highs since the Budget but the heavyweight banking and financial sector has not done so well.
The Nifty peaked at a new high of 9,119 before it declined on profit booking. Other broad indices such as the midcaps and smallcaps also hit new highs. So, the big long-term trend should be bullish by definition. Implied volatility remains high. FIIs were net buyers, even on Monday, when the market fell by over two per cent sharply. Domestic institutions have been net sellers through March. Operators and retail sold heavily on Monday. The rupee slid sharply, giving back some of the gains versus euro and yen, and looking set to test support at 63 against the dollar.
If the support at 8,700 breaks, we will see lower supports being tested at 50-point intervals on the Nifty. A break below 8,700 would imply the current short-term correction could turn into an intermediate correction. The 200-Day Moving Average is in the 8,050-8,100 zone and the previous intermediate correction saw support come in at 7,950-8,000. A move below that level would be taken seriously, in that it would indicate a potential trend reversal in the long-term bull market.
Trends are likely to be triggered by news. A calming statement from the Fed would be bullish and so would passage of ordinances through the Rajya Sabha. The Bank Nifty behaviour might be crucial. The BN bounced from a support of 18,225 before the Budget. The Budget session saw the index swinging between 19,000 and 19,800. It moved above 20,000 before it crashed to 19,225 on Monday. The Bank Nifty is high-weight and high-beta. If it slides below 18,200 (about 1,000 points down), the overall market will also dip.
The Nifty put-call ratio is the neutral zone It is at 1.01 across both a one-month and three-month timeframe. The March Nifty call chain has open interest (OI) peaking at 9,000c, with bulges at 9,100c, 9,200c, and 9,500c. The March Put OI is ample, between 8,000p and 9,000p, with large peaks at 8,000p, 8,400p, 8,500p, and 8,800p. The Nifty could easily move 200-plus points in any session, which means it could hit 8,000 or 9,200 within two or three sessions.
The index is held at 8,757 with the futures at a small premium. The March call chain is 8,800c (106), 8,900c (65), 9,000c (37), 9,100c (20), 9,200c (10). The March put chain is 8,700p (82), 8,600p (52), 8,500p (34), 8,400p (20), etc.
The near-to-money bullspread of long 8,800c, short 8,900c, costs 41, with a maximum payoff of 59. A long 8,900c, short 9,000c, costs 28 and pays a maximum 72 looks more attractive. Any bounce is likely to move the index above 8,900, at least.
A CTM bearspread of long 8,700p, short 8,600p costs 30 and pays 70. A long 8,600p, short 8,500p costs 18 and pays a maximum 82 and also looks attractive. A strangle set of long 8,600p, long 8,900c, short 8,500p, short 9,000c costs 47 and pays 53, with breakevens at 8,553, 8,947.
