US market trend, put-call ratios point to bearishness

The market went South through most of last week and then recovered, opening with an upside gap on Monday. Domestic sentiment improved, given election results favouring the BJP and also the diesel decontrol. But overseas sentiment may have been even more important. Most global equity markets saw recovery through last Friday.

The net effect over the past five to six sessions has been range trading with a progression of lower intra-day lows and highs. As of now, there is resistance above Nifty 7,950 and the latest support is at 7,725. A breakout above 7,950 would hit successive resistances at roughly 50-point intervals. A breakdown below 7,700 would find supports at 50-point intervals but it would set up a bearish pattern, with a likely downside till 7,500.

Despite the euphoria of the Haryana and Maharastra wins, and the positives of labour reforms, diesel decontrol and a hike in gas prices, the market could soon revert to following the lead set by foreign institutional investors (FIIs). There is usually a period in and around Diwali when domestic volumes dry up and FII attitude becomes ever more crucial.

This is because locals exit the markets and go on holiday. Chinese GDP data will be released during the festive period. That will undoubtedly influence FIIs one way or another. Settlement comes in a week after Diwali so there are chances of high volatility driven by thin trading.

Meanwhile, the dollar is hardening against the euro and there has been a big bond market rally pulling US treasury yields down. The major indices at the NYSE and Nasdaq have gone into the red for the calendar year and dipped below their respective 200 Day Moving Averages. The Nifty and the Dow Jones correlate quite strongly.

  If secular bear markets are in force in the US, it is extremely likely that the Indian indices will see net losses from here onwards. Since the Nifty is up 24 per cent since January, it is very unlikely to see net losses for the year. For reference, the 200-DMA is at around 7,100, which is some 11 per cent below the current prices.

On the results front, the IT biggies TCS and HCL Tech have disappointed. While a weaker rupee might buoy the sector, it's likely to underperform. But there has been reasonable earnings growth in many rupee-oriented companies. There are quite a lot of positive bets on the banking sector for example. Traders are betting that lower inflation and slow growth will goad the RBI into policy rate cuts. The Bank Nifty would have to be a major driver of any bullish fervour. It has pulled above the 16,000-mark but it has massive resistance above 16,300.

Option premiums remain high with settlement due soon. The Nifty's put-call ratios (PCR) look bearish with the PCR at 0.95 for the three-month set and at 0.97 for October. The Nifty Call chain has massive open interest (OI) at October 8,200c, which is the likely upper limit on a bounce. The put OI peaks at 7,800 but there's ample OI till 7,400.

The spot Nifty closed at 7,879 with the futures at 7,895 on Monday. The trader can still look at far-from money options.

A far-from money bullspread of long Oct 8,000c (28) and short 8,100c (10) costs 18 and pays a maximum of 82. A FFM bearspread of long Oct 7,800p (32) and short 7,800p (15) also costs 17 and has a maximum payoff of 83. Combining these two contracts, the long-short strangles have a cost of 35 and a max payoff of 65.