11,100 is a key support for the Nifty

The Nifty has slid through the past seven sessions. It broke support at 11,300. The next su­p­port is the 200-day moving a­v­erage.  The market is ex­h­i­biti­n­g many bearish ch­­­a­­­­r­­a­c­t­e­­ristics and one potentially bullish signal. 

The advance-decline ratios are negative, and higher volumes have been associated with stocks that have lost ground. The mid-caps and small-caps have lost more ground than the large-caps. However, the VIX is at low levels, which indicates traders aren’t too fearful.  The rupee has lost ground, but it is still held above Rs 69 to the dollar.  

The market is waiting for the news flow on the following. The US Federal Reserve’s next policy meeting is on July 30-31 and optimists are hoping for a rate cut. There may be positive news flow from the next round of US-China talks. There are also the Iran-US tensions and new perspective on Brexit as a new Prime Minister takes charge in the UK. 

Corporate results and advisories for the first quarter have not been very positive. As of now, the foreign portfolio investors are selling equity but buying debt. Retail continues to be net sellers, while domestic institutions are net buyers. The divergence between VIX and Nifty could be resolved by a Nifty bounce or a spike in the VIX in August. 

By definition, this remains a big bull market. There’s been a 6-7 per cent retraction from the highs of 12,103 to 11,270. If the Nifty doesn’t find support above 11,100, we may enter a new long-term bear market.  On any bounce, there will be strong resistance between 11,500 and 11,900. 

The Bank Nifty has lost more ground than the Nifty, with a retraction of 9 per cent from its highs. This has bearish implications for the broader market. The ‘Bank’ is at about 28,952 now. A strangle of Aug 29, long 30,000c (157) and long 28,000p (180) costs about 337. This can be offset by a short Aug 1, 30,000c (20), short 28,000p (25) to reduce net cost to 292. The break-evens would be 27,708, 30,292 by end-August settlement. 

The Nifty is at 11,272. A bearspread of long Aug 29, 11,100c (96), short 11,000c (72) costs 24 with maximum gain of 76. A bullspread of long Aug 29, 11,400c (127), short 11,500p (88) costs 39, with maximum g­ain of 61.  Strikes would need a movement of 130 up, or 170 d­own. The average session high-low range (last 10 sessions) is 109. As usual, a brave trader could go short on the August 29 series, intending to reverse direction on Monday when premiums should have fallen.