The market is clinging to support above 8,100 mark and there are high hopes resting on the Reserve Bank of India Policy Review. There is strong consensus that there will be a rate cut and that has probably had a somewhat bullish impact. Some analysts believe that there will be a big rate cut of 50 basis points or even more.
The Nifty is also hitting resistance above 8,200. There could be a breakout in either direction on news flow. If there is a big rate cut, the Nifty could move till 8,350-8,400. On the other hand, if hopes are belied, a breakdown till 8,000-8,050 is likely. The next week will see more volatility since the Federal Reserve is expected to hike rates and that will surely impact on all rupee and other emerging market assets. The long-term trend is hard to read. The 200-DMA is at about 8,150-8,175, where there appears to be strong resistance.
A move above the 200-DMA would be read as a positive signal, while the market trend would remain indeterminate, tending to bearish, if it did not fall below 7,915. A drop below 7,915 would emphasise the bearish pattern with lower lows. A rise above 8,500 would suggest a quick recovery is possible. If that cut doesn't come through, there could be a collapse of sentiment. The FIIs have been major sellers through November, exiting over Rs 39,000 crore of rupee assets (debt + equity). They have sold Rs 11,670 crore in December so far. Domestic institutions have matched them, in terms of buying equity.
The dollar will rise if the Fed does hike the policy rate. If the RBI cuts, the differential between the US Fed Fund rate and Indian Repo rate will narrow, and the dollar could gain even more. In hawala, the dollar is trading at a big premium.
The VIX remains very high. Corporate results have been poor and the prognosis for the second half is bad. If the index does slides below 7,900, it could actually drop till 7,500-7,600. It does look more likely to head South, with occasional rallies.
The Nifty Bank has seen wild swings. As of now, the Nifty Bank is around 18,450. A long Nifty Bank call of 19,000c (182) for December 29, and a long December 29, 18,000p (229) costs 411. Either end of this long strangle is about 500-600 points away and it could go into profit, with three big trending sessions. Traders could sell the December 15, 18,000p (143) and the December 1, 19,000c (93). This cuts the cost of the long strangle by 236, reducing it to 175. If the short strangle is struck, the long strangle will rise in value. Put-call ratios (PCRs) suggest a possible bounce, perhaps on a RBI cut. The PCR is above 1 for December, and for the next three months. The December Nifty call chain has good open interest (OI) till 9,500c, with the highest OI at 8,300c, and more peaks at 8,500c and 9,000c. The December put chain has a big peak of OI at 8,000p, with another bulge at 7,500p and good OI till 7,000p.
The Nifty is at 8,143 A bullspread with long December 8,300c (60), short 8,400c (32) costs 28 and pays a maximum 72. This is 155 points from money. A bearspread with long December 8,000p (70), short 7,900p (49) costs 21 and pays a maximum 79. This is 145 points from money. A wide strangle combining these two is practically zero-delta. The total premium is 49. The breakevens are at 7,951, 8,349. This position will be hit if there's a breakout in either direction from the current range.