Nifty faces big resistance between 7,450 and 7,600

The market has gained nine per cent since it hit a new low on Budget day. There are some signs of the uptrend running into resistance but the current sentiment still seems bullish. The Nifty hit a new 21-month low at 6,825 before it turned around. By Friday, it had tested the 7,500 mark and settled at 7,485. The breadth has been good and there's been high volumes. Domestic institutions sold into the rally but the FIIs have been big buyers through the week. Global volumes have also improved, after China applied yet another round of stimulus and strong US employment data came through.

However, the major market trend could still be down. Many traders and FIIs were net short going into the Budget and some of the momentum has come from covering. On the downside, the low to beat is now 6,825 (February 29 low).

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• Enormous resistances at Nifty 7,250-7,300 levels
• Further bearishness seems much more likely

 

On the upside, the Nifty faces big resistances between 7,450 and 7,600. A move beyond 7,600 setting up higher highs would be very encouraging. As the Budget was well-received, a bounce till 7,600, or beyond, till 7,850 is possible. Above 7,900, the trend would challenge the 200-Day Moving Average (200-DMA) and a move above the 200-DMA would be a signal that the major trend has reversed and gone bullish.

The Nifty Bank has run stronger than the overall market and so have NBFCs. There was a big bond market rally when the Budget was announced. There is now hope that the Reserve Bank of India (RBI) will cut rates. However, RBI's actions would, to some extent at least, be driven by action from the European Central Bank and the US Federal Reserve. It's also likely that RBI will not act out-of-turn at least until the new Monetary Policy Committee is installed.

The rupee gained sharply post-Budget, moving up by two per cent versus the dollar. If the ECB takes accommodative action, the euro could soften and a short euro/rupee would be tempting. Fed action or attitude could also affect the dollar/rupee values next week and IT majors would respond to changes in that key exchange rate.

The Bank Nifty hit a low of 13,407 on Monday and it has moved above 15,300. That's an extraordinary run. The financial index may now be due for some profit-booking. A long bank strangle with long March 15,000p (256), long March 16,000c (156) is not zero-delta since the index is held around 13,340. But, it may be worth taking since March will continue to be volatile. Three or four trending sessions could put this spread into profit with breakevens at about 14,595, 16,400.

The Nifty call option chain for March has ample open interest (OI) between 7,000c and 8,000c, with big peaks at 7,700c and 8,000c. The March put option chain has major OI peaks at 7,200p, 7,000p and high OI until 6,300p. The Nifty's put-call ratios are now looking healthy at above 1.

The Nifty closed at 7,485 on Monday. Close to money premiums are high with 7,500c (103), 7,500p (143) and 7,400p (103). The bullspread of long March 7,600c (60) short 7700c (32) costs 28 and pays a maximum 72 at about 115 from money. The bearspread of long 7,300p (72), short 7,200p (51) is also acceptable with a cost of 21 and a maximum return of 79. This is at about 185 points from money. A long-short strangle set combining these options, (long 7,300p, long 7,600c, short 7,200p, short 7,700c) costs 49 and pays 51. But, this is not zero delta. It would be better to take a view: Either go with the trend or wait for a clear signal of a breakdown.