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The market marked time on Monday. There are hopes of a rate cut in the next the Reserve Bank of India policy update on June 2. Monsoon projections are said to have improved. The Nifty is range bound between 8,300 and 8,400. Consensus is strongly in favour of a rate cut, of 50 basis points, rather than a minimum 25 bps. If those expectations are met, the Nifty could zoom 200-300 points quickly. However if the central bank holds rates at current levels, a dip to test support at 8,000 is possible.
Given the amount of trading we have seen in this zone, there will be congestion at every 50-point interval, whether the index goes up or down. Breadth is mildly negative with big stocks favoured at the moment. The FIIs were net sellers through May but the domestic institutions have stepped up buying, and more than counter-balanced FII selling. This rally started from a low of 7,997 on May 7. It appears stuck between 8,300 and 8,400 with an indeterminate short-term trend. An uptrend would have to push past 8,850 (the peak of April 15 was 8,844) to generate higher highs to confirm an intermediate uptrend. As and when it does beat the all time high of 9,119 (March 4), it will confirm the big bull market is still alive.
On the downside, the Nifty must stay above 7,997 on the next dip to break out of a pattern of lower lows. The last two dips were 7,997 (low May 7) and 8,144 (low, April 30). Ideally, the Nifty should find support above the 200-Day-Moving Average (200-DMA). The exponential 200-DMA is at around 8,200, while the simple 200-DMA is around 8,325. So, this condition is being just about met. The Q4 results continue to be disappointing but the market has discounted that. The fundamental consensus is that it could take two quarters, or even more, to see strong earnings growth. In the short-term, traders will probably bid the market up till June 2 at least. On the external front, the US Federal Reserve has signalled that it will hike USD rates in 2015. A Greek exit from the euro zone remains a possible threat.
That has led to USD hardening. A rate cut from RBI will be interesting for the forex market. In theory, it should cause to rupee weakening versus USD - rising dollar yields will come closer to falling rupee yields. In practice, if there is a flood of USD inflows to Indian assets as a result of a rate cut, the rupee might harden.
The financial index, the Bank Nifty, is liable to outperform until June 2, at least. A bullspread of long 19,000c (273) and short 19,500c (136) costs 137 and it could pay a maximum of 363. The Bank Nifty could jump higher if there is indeed a big rate cut. The Nifty's put-call ratios look healthy at about 1.10 for May, and 1.15 for June and July. However, PCR is not reliable this close to settlement. The June Call chain has open interest peaking at 8800c with another OI peak at 9,000c. The June Put OI has OI peaks 8,200p, 8,000p, and 7,900p.
A bullspread of long June 8,500c (84), short 8,600c (54) costs 30 and pays a maximum 70, at about 160 points from money. A bearspread of long 8,200p (94) , short 8,100p (68) costs 26 and has a maximum payoff of 74 at 140 points from money. Either spread could be hit next week. A combination long-short strangle would cost 56 and pay only 44 with breakevens at 8144, 8556. The risk :reward ratio is adverse.
