Nifty to stay above 200-DMA

The market marked time on Monday in the hope of a rate cut in the Reserve Bank India (RBI) policy update on Monday. There's strong consensus on the probability of a cut. Assuming RBI delivers, the market has, to some extent, already discounted a cut of 25 basis points in the repurchase rate. A larger cut would drive the market up. A negative speech from Governor Raghuram Rajan could lead to a downturn, even if there is a cut. If status quo is maintained, the market will see some selling.

The Nifty could move 200-300 points quickly in either direction from its current value of 8,433. The index is above the 200-Day Moving Average (200-DMA). The simple 200-DMA is at 8,335, while the exponential 200-DMA is 8,210. The spread between the two DMAs is large because the exponential average weights recent data, which are more bearish.

There is congestion at every 50-point interval but a rate cut might provide enough impetus to break that. Breadth is negative. Foreign institutional investors (FIIs) were net sellers through May but the domestic institutions stepped up buying, and more than counter-balanced FII selling. FIIs did buy on Friday in the new June settlement.

This rally started from a low of 7,997 on May 7. It has tested resistance between 8,400 and 8,450. An uptrend would have to push past 8,850 (the peak of April 15 was 8,844) to generate higher highs and confirm an intermediate uptrend. A move beyond the all time high of 9,119 (March 4) would confirm the big bull trend. On the downside, the Nifty must stay above 7,997 on the next dip. The last two dips were 7,997 (low May 7) and 8,144 (low, April 30). Ideally, the Nifty should find support above the 200-DMA.

The disappointing Q4 results have been more or less discounted. But there are few positive triggers available, apart from the possibility of rate cuts. Most investors are not expecting strong earnings growth for the next quarter or two. The hopes of a rate cut leading to higher dollar inflows into both equity and debt has led to a hardening rupee.

The movements of the financial index, the Bank Nifty, is liable to be exaggerated in comparison to the Nifty. The Bank Nifty could move till 19,500 or even 20,000 on a rate cut. But it could also fall till 17,500 or lower, if the Governor makes a hawkish statement and refuses to cut rates. Other financials would also move with the Bank Nifty.

The Nifty's put-call ratios look healthy at about 1.10 for June, and 1.19 for the three month period, June-August. The June Call chain has open interest (OI) peaking at 8,800c with another OI peak at 9,000c. The June Put OI has OI peaking at 8,000p. It is early in the settlement so this wide range of expectations is not unreasonable. A trader could assume that, if a trend develops, the next stop may be 8,800, or 8,000.

Given those expectations, it is possible to take wide positions since premiums are also on the higher side. A bullspread of long June 8,500c (107), short 8,600c (68) costs 39 and pays a maximum 61, with strike at about 70 points from money. A long 8,600c (68), short 8,700c (41) costs 27 and pays 73 at 170 points from money.

A bearspread of long 8,400p (126), short 8,300p (90) costs 36 and has a maximum payoff of 64 at 34 points from money. A wider spread of long 8,300p (90), short 8,200p (63) costs 27 and pays 73 at 134 points from money. A long 8,300p, long 8,600c, short 8,200p, short 8,700c costs 54 with breakevens at 8,246, 8,654.