The Bank Nifty is likely to be a bellwether.
The market has tended to range-trade with a small negative bias since the new year. The foreign institutional investors (FIIs) have not really returned to action from their holidays.
Domestic investors are worried about the prospect of rate increases and pressure on bank balance sheets as the Reserve Bank of India (RBI) imposes new non-performing asset (NPA) norms. Macro economic data is also awaited and so are third quarter results.
The Nifty closed just below 6,200 on Monday. It has range-traded, testing support at 6,150 and resistance at 6,250 in the past four sessions and seen moderate net losses. Volumes are moderate. Breadth is reasonable.
Technically speaking, the long-term trend and the intermediate trend both continue to look bullish.
Since the all-time high of 6,415 on December 9, the index has remained firmly above the 200-Day Moving Average and in fact, it has not dropped below 6,150.
The benchmark for the long-term would remain 6,415 while a breakdown below 6,150 on the downside could find supports at 50-point intervals. A move beyond 6,415 to a new all-time high would clearly be positive. A downside breakout could hit targets in the 5,900-5,950 range.
The bearish factors include RBI raising rates if the inflation numbers don’t look good. The Index of Industrial Production is also due this weekend and a weak outlook could be a bearish factor. Corporate results will start flowing from next week and if there is no evidence of improvement, that would obviously be bearish as well.
Finally, there’s the US Fed’s taper impact. If FIIs do cut India allocations, that would really hurt, since domestic players don’t have the deep pockets required to buy at these levels.
The Bank Nifty is likely to be a bellwether. The financial index is testing support at 11,000-11,100 and that looks fragile. If support breaks, a correction till 10,500 is possible. Any trending move by the Bank Nifty is liable to influence the broader market.
A bearspread in the Bank Nifty could be a decent gamble, with a long 11,000p (235) offset by a short 10,500p (87), for a net cost of 148 and a potential maximum return of 352.
The dollar has seen some strengthening. RBI is believed to have intervened once but might be reluctant to interfere if there’s a smooth downtrend. Unless there is heavy FII buying, the rupee will trend down naturally because the taper has had the inevitable effect of raising dollar treasury yields.
If Infosys delivers good results, a strong dollar could create a big uptrend in information technology stocks.
The put-call ratio of the Nifty remains in bearish territory. The PCR is around 0.95 for both January and the three-month period. This is far enough into the settlement to be read as a bearish signal. The range-trading has pushed option premia down somewhat.
Traders could assume the Nifty will stay within the bounds of 6,000-6,400 for the next five sessions. Breakouts or breakdowns beyond this zone could hit 5,850 or 6,650. A long January 6,300c (63) versus short 6,400c (32) costs 31 and pays 69.
This position is well out of money with the spot Nifty at 6,191. A long 6,100p (50) and short 6,000p (29) costs 21 and pays 79. This is also at roughly the same distance from money.
The two positions could be combined to give a zero-delta, long-short strangle combination, which costs 52 with breakevens at 6,048, 6,352. These are acceptable risk:return ratios, since there’s a good chance of picking up some profit either way if the range-trading persists for a few more sessions.