External events to give direction

The market has found support twice in successive sessions, at around 7,940-7,950. Although there was a small recovery on Monday, with the Nifty pulling above the psychologically important 8,000 level, overall sentiment seems to remain bearish.

Internationally, Greece remains a cause of concern. Traders will also parse every nuance from the briefing after the FOMC meeting this week. If the FOMC is dovish, and there is no timeline for the next US policy rate hike, the market sentiment could turn bullish.

On the domestic front, the macro-economic news is reasonable. The Index of Industrial Production surprised on the upside, consumer inflation is acceptable, indirect tax collections are up and the current account deficit is down.  However the RBI is not expected to ease rates in a hurry again, given fears on the monsoon front.  

The Nifty dropped from 8,433 on June 1 to hit 7,940 on June 13 and 7,944 on June 15. That is roughly six per cent correction. It is well below its own 200 Day Moving Averages (the exponential and simple 200 DMAs are at 8,197 and 8,354 respectively).  FPIs have been net sellers through May and June in equity and debt. Domestic institutions have stepped up buying.

The index has executed a pattern of lower lows. The previous intra-day low for 2015 was at 7,997  (May 7) and that's been breached. Breadth is poor with Declines outnumbering Advances. Many stocks have hit 52-week lows. The sustainability of the big bull market trend could now be questioned. However, this has been a persistent uptrend in force since December 2012 when the Nifty rallied from 4,600 levels. There have been prior dips below the 200 DMA during that 42-month run. So this could be a very temporary drop.

  At the intermediate level, the previous uptrend fizzled out between 8,450-8,500 with a high of 8,489 (May 22). An uptrend would have had to push past 8,500 and ideally, past 8,850 (the peak of April 15 was 8844) to generate higher highs. If the Fed delays its hike and Greece resolves positively, the market could respond with a rally strong enough to do that.

The BankNifty has dropped below 17,500 and it is below its own 200-DMAs (the 200 Exponential MA is at 17,568; 200 Simple MA is at 17,916). A bearspread of long 17000p (105), short 16,500p (29) costs 81and could pay a maximum of 419.  The USD has hardened and it could harden further if the Fed hikes, or just makes a hawkish statement things. The IT sector may therefore, provide some sort of hedge since IT stocks do move up when the rupee is down.  

The Nifty's put-call ratios are bearish. The June PCR is down to 0.87 while the 3-month PCR is at about 0.97.  The June Call chain has open interest peaks at 8200c, 8500c and 9000c.  The June Put OI has OI peaking at 7800p,  with ample OI down to 7400p and reasonable OI at 7000p.

There's enough time for big moves. If the downtrend continues, a drop till 7,400 could happen before settlement. A bounce till 8,500 is also possible if the trend reverses.  

A bullspread of long June 8100c (50), short 8200c (24) costs 26 and pays a maximum 74, with the strike at 86 points from money. A bearspread of long 7900p (51), short 7800p (27) costs 24 and pays 76 at 114 points from money. The on-the-money 8000c (93), 8000 (87) have a combined straddle value of 180.  A combination of the long 8200c, long 7800p, short 8300c (11), short 7700p (15), costs 26 and returns a maximum of 74.