The Reserve Bank of India (RBI) policy may have induced a breakdown with the Nifty sliding below the 6,150 support level. However, this trend is not pronounced. Traders are waiting for the US Federal Open Market Committee (FOMC) meeting to conclude. The settlement session may not see too much volatility but there could be a trend established on Friday after the FOMC outcome.
Technically speaking, the Nifty and Bank Nifty appear to be in the early stages of breakdowns. The short-term trend is negative and the intermediate trend may also be negative. However, a bounce-back into the previous range-trading pattern may occur if the Fed decides not to accelerate the pace of tapering. The RBI surprised with a rise of the repo rate. Chairman Rajan's speech offered some hope to bulls. He indicated that the central bank may hold rates at current levels if retail inflation doesn’t spike.
The drop below Nifty 6,150, appears to have broken the prior trading range of 6,150-6,350. The market held at support around 6,075. If it doesn't bounce back in the next three sessions, the targets could be 5,900-5,950. That’s the vicinity of the 200 Day Moving Average. A move below 5,900 could mean a bearish long-term trend.
Breadth indicators are poor. The advance-declines ratio has turned negative since the Credit Policy. This means retail is going bearish. The net institutional position is also net bearish with both Domestic Institutional Investors and the FIIs being net sellers in January.
The Bank Nifty has broken down below support at 10,700. It has held at support in the 10,350 zone but this could be temporary. If the financial index breaks down below 10,300, it could slide till 9,900 within two sessions. This could in fact, be the major trigger for a broader bear-market. There is a strong case for holding long February puts at the 10,200p strike or at lower strikes.
The dollar-rupee rate has been reasonably stable despite the normal end-of-month demand from importers. If the FOMC accelerates the pace of tapering from the current $10 billion a month, the dollar will harden. This would put pressure on the overall market but also enhance the defensive value of IT stocks and maybe, pharma. Given FOMC outcomes, the market could be quite volatile on Friday and Monday. If the FOMC holds the rate of tapering, any relief rally is likely to be small. The Nifty’s put-call ratio (PCR) is negative for January at around 0.89. It is just about positive for February and March combined, at around 1.07. This close to settlement, PCR is not reliable. But this looks bearish for what it is worth. Carryover has been low and there could be a lot of unhedged Jan calls closed out, rather than carried over.
Traders should assume that the Nifty could swing anywhere between 5,950 to 6,300 in the next three to five sessions. February bullspreads close to money don't have attractive risk:return ratios. A long Feb 6,150c (112) and a sort 6,250c (66) costs 66 and pays a maximum of 34. Moving away, a long 6,200c (90) and short 6,300c (50) costs 40 and pays a maximum 60.
A bearspread of long 6,100p (94) and short 6,000p (61) costs 33 and pays a max 67. Moving away from money, a long 6,050p (75) and a short 5,950p (49) costs 26 and pays 74. The nearest strangle with a reasonable risk:reward is the long 6,000p (61), long 6,300c (50), short 5,900p (39) and short 6,500c (26). This costs a net 47 with breakevens at 5,953, 6,347.
