 "Most indicators are bearish")
The market has slid since the announcement by the US Federal Open Markets Committee (FOMC) that the tapering of the Quantitative Expansion Programme (QE3) may start sooner than envisaged. We may have a perverse outcome where slower US GDP growth triggers a market recovery.
As of now, the intermediate trend is firmly down, though short-covering on settlement could hold the market up for a session or two. The long-term trend is also down. The rupee has dropped to a record low on heavy foreign institutional investor (FII) selling.
The intermediate trend has dropped through May and June. The Nifty has found support for the past three sessions at the level of 5,565-5,585. If that support breaks, the next stop could be 5,477, which was the 2013 low, recorded in April. The Nifty is also below its 200 day moving average (DMA), which is around 5,810. This suggests the long-term trend is bearish, though there was a quick recovery in April, when the 200 DMA was violated for three weeks.
Shorter-term MAs are also indicating a bearish trend. The Nifty is below its own seven DMA, 10 DMA, 20 DMA. Those averages are bearishly inverted, meaning the 20 DMA is above the 10 DMA, which is above the seven DMA.
On the upside, any recovery must climb above the 5,810 level to suggest a sustainable turnaround.
On the downside, support at 5,565 would have to hold. A first sign of recovery would be a move above 5,755, which was the prevailing level before the FOMC meeting.
Other indices have done worse. The Nifty Junior (down 10.5 per cent in the past 20 sessions) has lost more ground than the Nifty (down eight per cent), while the small- and mid-caps indices have hit 52-week lows. The Bank Nifty (down 14 per cent) has also lost a lot of ground. The Bank Nifty is testing support at the 11,000-11,050 level and a drop could pull it down till 10,450-10,500. The CNXIT is the only outlier due to the boost from the falling rupee.
Apart from a rising current account deficit, the rupee has been hit hard by continuous FII selling. The dollar-rupee rate has dropped below 60 and the downtrend seems strong. Further losses are not unlikely and it's possible that the RBI would have to intervene with desperate action.
The Nifty's put-call ratio (PCR) is bearish. The three-month PCR is at 0.85, while the June PCR is at 0.7. In fact, these ratios are so low that one could expect a bounce on the grounds of mean reversion. Obviously, the market is oversold, but it could remain oversold indefinitely.
A bullspread of long July 5,700c (71) and short 5,800c (40) costs 31 and pays a maximum 69. A bearspread of long July 5,500p (90) and short 5,400p (60) has a similar risk:reward ratio with a cost of 30 and a maximum payout of 70.
Given a Nifty spot value of 5,588, both these spreads could be struck in July. However, the combined effect of long-short strangle with these positions has an adverse risk:reward ratio with a cost of 62 and maximum payoff of 38. A trader should not be taking strangles yet. It's likely that premiums far from money will decline in the next two sessions.
As of now, the intermediate trend is firmly down, though short-covering on settlement could hold the market up for a session or two. The long-term trend is also down. The rupee has dropped to a record low on heavy foreign institutional investor (FII) selling.
The intermediate trend has dropped through May and June. The Nifty has found support for the past three sessions at the level of 5,565-5,585. If that support breaks, the next stop could be 5,477, which was the 2013 low, recorded in April. The Nifty is also below its 200 day moving average (DMA), which is around 5,810. This suggests the long-term trend is bearish, though there was a quick recovery in April, when the 200 DMA was violated for three weeks.
Shorter-term MAs are also indicating a bearish trend. The Nifty is below its own seven DMA, 10 DMA, 20 DMA. Those averages are bearishly inverted, meaning the 20 DMA is above the 10 DMA, which is above the seven DMA.
On the upside, any recovery must climb above the 5,810 level to suggest a sustainable turnaround.
On the downside, support at 5,565 would have to hold. A first sign of recovery would be a move above 5,755, which was the prevailing level before the FOMC meeting.
Other indices have done worse. The Nifty Junior (down 10.5 per cent in the past 20 sessions) has lost more ground than the Nifty (down eight per cent), while the small- and mid-caps indices have hit 52-week lows. The Bank Nifty (down 14 per cent) has also lost a lot of ground. The Bank Nifty is testing support at the 11,000-11,050 level and a drop could pull it down till 10,450-10,500. The CNXIT is the only outlier due to the boost from the falling rupee.
Apart from a rising current account deficit, the rupee has been hit hard by continuous FII selling. The dollar-rupee rate has dropped below 60 and the downtrend seems strong. Further losses are not unlikely and it's possible that the RBI would have to intervene with desperate action.
The Nifty's put-call ratio (PCR) is bearish. The three-month PCR is at 0.85, while the June PCR is at 0.7. In fact, these ratios are so low that one could expect a bounce on the grounds of mean reversion. Obviously, the market is oversold, but it could remain oversold indefinitely.
A bullspread of long July 5,700c (71) and short 5,800c (40) costs 31 and pays a maximum 69. A bearspread of long July 5,500p (90) and short 5,400p (60) has a similar risk:reward ratio with a cost of 30 and a maximum payout of 70.
Given a Nifty spot value of 5,588, both these spreads could be struck in July. However, the combined effect of long-short strangle with these positions has an adverse risk:reward ratio with a cost of 62 and maximum payoff of 38. A trader should not be taking strangles yet. It's likely that premiums far from money will decline in the next two sessions.