 "Nifty level of 7,530 is crucial")
The Nifty has made a downside breakout in anticipation of the Fed raising the US policy interest rate this week. The index broke support at 7,700-7,725 and it is testing support between 7,575 and 7,600, which is holding, so far.
The trends look to be bearish across all time frames. The long-term trend must be bearish since the Nifty is trading well below its own 200-Day Moving Averages (200-DMA) and has done so, since late August 2015. The simple 200-DMA is at around 8,250, while the exponential 200-DMA is at 8,100 according to the NSE's calculations.
The global mood is nervous though markets have probably discounted a dollar rate hike on Thursday. Most markets and currencies have slid. The yuan appears to be under especial pressure. The rupee is nearing historic lows against the dollar but it could actually gain against the euro, or yen.
Foreign Institutional Investors (FIIs) have been consistent net sellers of rupee equity and debt through November and the first half of December. Retail investors are net positive, albeit with reduced volumes. Domestic Institutions are also net positive. Volumes have picked up somewhat in the past few sessions.
If the Fed does not raise, there would be a relief rally and there could be a rally even if the raise is token and the Fed guidance is dovish. However, the Nifty could also breakdown below 7,530 and that would mean new 52-week lows. In that case, the pattern of lower highs (already established) and lower lows (if the Nifty dips below 7,530) would imply further losses, and the breakdown would have a target of 7,200 in the next month or so.
If the index bounces and moves above 8,250, it would be a very positive signal. That is a long way off. However, the latest macro-data is reasonably positive with inflation running as expected and an apparent pick up in manufacturing with strong gains in the October index of industrial production. So, there could be contrarian buying.
The Nifty's put-call ratios are very bearish, hovering at around 0.85. The call chain for December has ample open interest (OI) between 8,000c and 9,000c with a big peak at 8,000c, and lower peaks at 8,500c, 9,000c. The December put chain has big OI peaks at 7,500p and 8,000p (in the money) and excellent OI till 7,000.
The trader can afford to seek wider positions due to the promise of volatility. The Nifty traded at 7,650 on Monday, with the futures premium at around 25. A bullspread of long 7,700c (95), short 7,800c (53) would cost 41and pay a maximum of 59, this is at 50 points from spot. A bullspread of long December 7,800c (53), short 7,900c (27) costs 26 with a maximum payoff of 74. This is at 150 points from spot.
A bearspread of long December 7,600p (88), short 7,500p (60) costs 28 and pays a maximum 72, and it is 50 points from spot. A wider long 7,500p (60), short 7,400p (39) costs 20 and pays a maximum 80 at 150 points from spot.
The near-the-money bearspread has a good return: risk ratio, while the wider long 7,800c, short 7,900c bullspread looks attractive. A trader could also combine the long 7,500p, long 7,800c, short 7,400p, short 7,900c for a cost of 46 and a maximum pay off of 54 and breakevens at 7,454, 7,846.
