 "Market awaits Fed, RBI policy")
The market has lost ground steadily since hitting an all-time high on Monday, December 9. This week will see policy statements from the US Federal Reserve and from the Reserve Bank of India (RBI). Those are both expected to be somewhat bearish in impact.
The decline came from a new record high of Nifty 6,415 and since then, there have been losses in every trading session. The market remains above key supports such as the 200-Day Moving average but the short-term trend looks grim.
The breakout to a new high was technically speaking, a failed signal. Most mechanical trend-following systems would have advocated a long entry and then seen a stop-loss triggered when the index fell below 6,200.
The long-term trend must still be considered bullish. The intermediate trend is difficult to read and could be decided only by the weekend. The index has support resistance zones art roughly every 50 points so, it is relatively easy to stop-loss and trade. Given the focus on tapering of the US Fed’s expansion and the RBI policy, the dollar-rupee rate and the BankNifty will both be in major focus. The dollar is likely to spike up against the rupee if the Fed decides to taper in January itself. In that case, apart from long positions in the currency itself, traders will be looking to go long in IT shares and maybe in pharma too.
The Bank Nifty has already swung down sharply. Obviously, the market is braced for a downturn after poor inflation numbers on both consumer index and the wholesale index. Minimally a hike of 25 basis points on the repurchase rate is expected.
If RBI raises the repurchase rate by more than expected, or hikes the cash reserve ratio as well as the repo, the financial index could crash. A fall of 700-1000 points from current levels could occur – pulling it down to 10,400-10,700. On the other hand, if RBI doesn’t raise at all and maintains status quo, the Bank Nifty could swing up by 700-plus points to around 12,100. A strangle of long 12,000c (66) and long 11,000p (102) will see likely doubling of premia if either end is struck.
The Nifty's put/call ratios remain low but still in neutral to bullish territory. The December PCR is at 1.05 while the three-month PCR is at 1.01. If the implied volatility signals are indicative, traders now think a big move late in December as less likely. Premia have now started falling, with an expiry effect visible at some distance from money.
It would be sensible to stay braced for end-month values in the 5,900-6,500 range, with a current bias towards a downtrend. The spot Nifty is at 6,155, with a futures premium of 15-20 points. A strangle of long 6,200c (64) and long 6,100p (42) costs about 106 and one of the breakevens of 6,305 or 6,000 could be hit by the end of the week.
A combination of these two close-to-money spreads would equate to a long-short strangle combination. This costs about 58 and pays 42. While the risk:reward ratio is adverse, the chances of both ends of this strangle being hit is quite high.
The decline came from a new record high of Nifty 6,415 and since then, there have been losses in every trading session. The market remains above key supports such as the 200-Day Moving average but the short-term trend looks grim.
The breakout to a new high was technically speaking, a failed signal. Most mechanical trend-following systems would have advocated a long entry and then seen a stop-loss triggered when the index fell below 6,200.
The long-term trend must still be considered bullish. The intermediate trend is difficult to read and could be decided only by the weekend. The index has support resistance zones art roughly every 50 points so, it is relatively easy to stop-loss and trade. Given the focus on tapering of the US Fed’s expansion and the RBI policy, the dollar-rupee rate and the BankNifty will both be in major focus. The dollar is likely to spike up against the rupee if the Fed decides to taper in January itself. In that case, apart from long positions in the currency itself, traders will be looking to go long in IT shares and maybe in pharma too.
The Bank Nifty has already swung down sharply. Obviously, the market is braced for a downturn after poor inflation numbers on both consumer index and the wholesale index. Minimally a hike of 25 basis points on the repurchase rate is expected.
If RBI raises the repurchase rate by more than expected, or hikes the cash reserve ratio as well as the repo, the financial index could crash. A fall of 700-1000 points from current levels could occur – pulling it down to 10,400-10,700. On the other hand, if RBI doesn’t raise at all and maintains status quo, the Bank Nifty could swing up by 700-plus points to around 12,100. A strangle of long 12,000c (66) and long 11,000p (102) will see likely doubling of premia if either end is struck.
The Nifty's put/call ratios remain low but still in neutral to bullish territory. The December PCR is at 1.05 while the three-month PCR is at 1.01. If the implied volatility signals are indicative, traders now think a big move late in December as less likely. Premia have now started falling, with an expiry effect visible at some distance from money.
It would be sensible to stay braced for end-month values in the 5,900-6,500 range, with a current bias towards a downtrend. The spot Nifty is at 6,155, with a futures premium of 15-20 points. A strangle of long 6,200c (64) and long 6,100p (42) costs about 106 and one of the breakevens of 6,305 or 6,000 could be hit by the end of the week.
A combination of these two close-to-money spreads would equate to a long-short strangle combination. This costs about 58 and pays 42. While the risk:reward ratio is adverse, the chances of both ends of this strangle being hit is quite high.