7,950-8,050 range in settlement

The market went into a sharp downtrend on anticipation of the Coalgate verdict. It settled down somewhat after the verdict. The sentiment looks bearish and there could be further falls early in the next settlement. Now, options premiums show the settlement session may pass through without high volatility.

The Nifty has tested support in 7,930-7,950 several times and that has held. If it breaks, the major index could slide till 7,850, and then till 7,775 or 7,700, going by Fibonacci-based retracement calculations.  Dips below 7,700 could mean a strong intermediate downtrend.

If the support at 7,950 holds, the upside is limited, unless the Nifty beats resistance between 8,125 and 8,175 and heads to highs. Retail sentiment seems negative. The net institutional attitude has been negative in the past few sessions. Domestic institutions have been moderate buyers while foreign institutional investors (FIIs) have been heavier sellers.  

So far as the settlement session goes, the premiums close to money are low, meaning traders expect the market to stay in 7,950-8,050 for this session. If it moves beyond, short-covering could result in a sudden big move. But for reasons given below, a big move immediately after settlement is likely.

The BankNifty remains a key driver and it could lose more ground than the overall market. The Reserve Bank Governor's recent statements are seen as ruling out possible rate cuts in this financial year. If the BankNifty drops below 15,500, it could slide till the 15,000 and an October bearspread of long 15,500p(167) and short 15,000p (60) look a reasonable gamble with a possible maximum payoff of 392 for a cost of 107.

The forex market could be hard to call but there's cause to suspect October will be volatile. The Federal Reserve will taper, while the European Central Bank (ECB) will cut rates. This should lead to a harder dollar and a weaker euro. Dollar-rupee may see a sharper movement in favour of the dollar if there's heavy FII selling. A short euro-rupee may be reasonable. Information technology (IT) and pharma could come into play if the rupee loses ground. There has been a flight to fast-moving consumer goods.

The Nifty's Put-Call ratios are very bearish. This is not so reliable a signal close to the settlement but it gels with other bearish indicators and could mean a sharp drop early into October. The Nifty's put-call ratio is at 0.9 for September and for the three-month set.

The Nifty Call chain has massive open interest (OI) at October 8,200c, which would be the likely upper limit on a short-term bounce. The Put chain has a lot of OI down till 7,500. The spot Nifty index closed at 8,002, with September Nifty at 8,015 and October at 8,064. If the market goes bearish, the October futures will lose more ground than September's.  This may set up an arbitrage opportunity. A far-from money bullspread of long October 8,100c (101) and short 8,200c (61) costs 40 and pays a maximum of 60. A FFM bearspread of long Oct 7,900p (60) and short 7,800p (37) costs 23 and has a maximum payoff of 77. There's mispricing here, given 7,900p and 8,100c are at the same distance from spot. One implication could be expectations are positive since the 8,000c (154) is much more expensive than 8,000p(93). Combining these two gives a negative risk:return ratio, with a cost of 63 and maximum payoff of 37.