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The market has found support thrice in successive sessions, at 7,940-7,950 before it rebounded through the next seven sessions. Wednesday saw a selloff on the eve of the settlement. The indices remain above the technically important level of the 200-Day Moving Averages (200-DMA). This could mean a recovery through the July settlement but it is too early to tell.
Internationally, Greece remains a cause of concern but the dovish statement by the FOMC has put some heart back into the market. If some sort of settlement is cobbled together for Greece, the market could rebound by a distance.
On the domestic front, macro-economic news seems reasonable. The monsoons seem to have delivered a positive surprise although it is early days. Hence, inflation could also be lower than expected and in that case, the Reserve Bank of India (RBI) may consider easing rates soon. The Nifty dropped from 8,433 on June 1 to hit 7,940 on June 13 and 7,944 on June 15, and 7,952 on June 16. That was roughly six per cent correction. After that, the market rebounded till a high of 8,421 on June 24.
That level is difficult to read. On the positive side, the index is now hovering at, or above, its own 200-DMA (the exponential and simple 200-DMAs are at 8,200 and 8,366, respectively). It has established a solid support at that 7,950 level. The FPIs have been net sellers through May, June and July in equity and debt. The domestic institutions have stepped up buying. The index has however, executed a pattern of lower lows. Also, the high of 8,421 was lower than the prior highs. This is a bearish signal.
The sustainability of the big bull market trend remains in question. However, given that the bull market has remained in force since December 2012, when the Nifty rallied from 4,600 levels, we could give them the benefit of the doubt. There have been prior dips below the 200-DMA during that 42-month run. So, this drop could also be very temporary.
The next high has to move above 8,489 (high of May 22) to register a conclusive higher high. An uptrend would have had to push past 8,500 and ideally, past 8,850 (the peak of April 15 was 8,844). If Greece resolves positively, the market could see a rally which was strong enough.
The BankNifty dropped till 17,293, well below its own 200-DMAs and it bounced till a high of 18,499 on Wednesday. A long July 18,000p (290) and long July 19,000c (194) could work. The rupee has hardened versus USD. However, the euro could move North versus every currency if Greece resolves. So, there is a case for being long euro. The Nifty's put-call ratios (PCR) have turned healthy - however, PCR tends to be a poor indicator close to settlement. The overall PCR is at around 1.29. The July Call chain has open interest (OI) peaking at 8,400c but there is ample OI at 9,000c. The July Put OI has OI peaking at 7,900p, with ample OI down to 7,500p.
Given a new settlement, a move till 7,900 or till 9,000 is entirely possible within say 10-sessions. A bullspread of long July 8,500c (91), short 8,600c (57) costs 34 and pays a maximum 66, with the strike at 140 points from money. A bearspread of long 8,200p (90), short 8,100p (65) costs 25 and pays 75 at 160 points from money. Putting together a long-short strangle set with a positive reward to ratio involves taking a long 8,600c, long 8,100p, short 8,700c (36), short 8,000p (48). That is much wider than comfortable and it is worth waiting for premia to drop.
