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The post-Budget correction seems to have ended, at least for the moment. Support held at the level of Nifty 7,425 and the market has made a recovery. We'll have to wait and watch for signals that help us to decode the intermediate trend. There appears to be some resistance in the Nifty 7,725-7,750 zone. Trends over the next 10 sessions could be driven by a combination of Q1 results, India-specific macro-economic data and geopolitical considerations.
To take the last factor first, the continued fighting in West Asia could impact crude prices at some stage. In fact, it is safer to assume that it will. That would trigger some sort of sell-off in the Indian markets. As far as macro-economic data is concerned, it is reasonably good with inflation down and the Index of Industrial Production (IIP) rising. However the monsoon failure could change the odds. As far as corporate results are concerned, early bird results are more or less up to expectations so far. The pattern of net Foreign Institutional Investor (FII) buying and Domestic Institutional Investor (DII) selling has continued post-Budget.
The market could see ranged trading between 7,450 and 7,750 with an indeterminate trend in the short-term and medium-term. A fall below 7,400 would signal that the intermediate trend had gone negative. A rise above 7,808 would signal that the intermediate trend had gone very positive and of course, it would be a new all-time high. Small-caps and mid-caps lost quite a lot of ground post-Budget as retail exited. There has also been a sharp but selective bounce in smaller stocks. Retail players are definitely in the market but they are being more choosy.
The long-term trend would be reckoned up, of course. But range trading could continue indefinitely. The market scores positive on one rule of thumb. It was at 7,200 levels prior to the election results on May 16 and it has effortlessly stayed above that level.
The Bank Nifty has seen some recovery but there appears to be a little too much optimism about bank results and a poor performance by the big public sector banks could derail sentiment. If crude spikes up, the dollar is also very likely to gain versus the rupee. In that case, information technology would become a short-term performer.
The Nifty's put-call ratio has recovered from highly overbought levels. The July PCR and the three-month PCR are now both at about 1, which is a neutral valuation. Option premia have eased off quite a lot. This is partly due to settlement considerations and partly a lack of fear in the market.
There is ample open interest upto the July 8,500c though the call OI peaks at 8,000c. In the puts, there is OI down to 6,500p but the peak is at 7,000p with another big bulge at 7,300p.
The index is at 7,684 and the futures is slightly in backwardation. A close-to-money bullspread of long 7,700c (58) and short 7,800c (22) costs 36 and maximum payoff of 64. A close to money bearspread of long 7,600p (35) and short 7,500p (16) is also good with a cost of 19 and payoff of 81. The bearspread is further from money.
If these two spreads are combined, the resulting long-short strangle is quite attractive. The position costs 55 and the maximum return is 45. However, the breakevens are at 7,545, 7,754, which are both quite close to money. This compensates for the adverse risk-reward ratio, since both sides of this position could be hit.
