Enormous resistances at Nifty 7,250-7,300 levels

Budget Day saw an extraordinary session where the market hit new lows before turning around. The following session also saw strong buying. It remains to be seen if this relief rally can be sustained but there has certainly been a turnaround in sentiment.

The National Stock Exchange's Nifty hit a new 21-month low at 6,825 before it turned around. Although it ended Budget session in the red, there was a big bounce on Tuesday, as the index moved up by over three per cent and nearly 250 points.
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• Further bearishness seems much more likely

 


Tuesday's move was backed by excellent breadth and of course, both sessions had high volume. While domestic institutions have bought throughout, foreign institutional investors (FIIs) were net sellers on Monday. But as of Tuesday, it appeared that FIIs had changed stance and bought while retail had gone positive, as well. Overall, global volumes have also improved, after China applied yet another round of stimulus.

However, the major technical trend could still be down despite the big session. Many traders and FIIs were net short going into the Budget and some of the momentum came from covering. As of now, the market has seen lower lows on Monday. On the downside, the low to beat is now 6,825 (February 29 low).

On the upside, the Nifty has enormous resistances to beat at the 7,250-7,300 levels, the first target to beat. If it moves above 7,241 (the 21-month low of January 20, 2016), it could have a clear run till around the 7,450 level. Between 7,450 and 7,600, it will face another band of massive selling pressure. A move beyond 7,600 setting up higher highs would be very encouraging. Given that the Budget was well-received, a bounce till 7,600, or beyond, till 7,850 is possible.

The Nifty Bank has run stronger than the overall market and so have Non-bank financial companies (NBFCs). There was a big bond market rally when the Budget announced it would hold the fiscal deficit to 3.5 per cent. There is now hope that the Reserve Ban k of India (RBI) will cut rates, with some optimists speculating on an out-of-turn cut as occurred last year.

The Bank Nifty hit a low 13,407 on Monday but it has moved till 14,412 in two sessions. That's extraordinary. But the financial index may now be due for some profit-booking. A long Bank strangle with long Mar 14,000p (201), long Mar 15,000c (160) is not zero-delta with the index around 14,410. But this is worth taking since March will continue to be volatile. Four trending sessions could put this spread into profit. Breakevens are at 13,640, 15,360.

The Nifty call option chain for March has ample open interest (OI) between 7,000c and 8,000c, with a big peak at 7,700c. The March put option chain has a major big OI peaks at 7,000p and high OI until 6,300p. The Nifty's put-call ratios (PCR) are still look bearish at about 0.95 but PCR is not a very reliable signal.

The Nifty closed at 7,222 on Tuesday. Close to money premiums are high. The March 7,300c (104), 7,400c (65), 7,500c (39) are key. A long 7,400c, short 7,500c costs 26 and pays a maximum 74 though its 180 points from money. The bearspread of long 7,100p (93), short 7,000p (67) is also acceptable with a similar cost of 26 and maximum return of 74. This is about 120 points from money. A long-short strange could be take of long 7,400c, long 7,100p, short 7,000p, short 7,500c. This costs 52, pays 48 and it's not zero-delta.

The option trader may also prefer to wait a few sessions. While a trend has apparently been established, it will test key resistances soon. Wait for either a confirmation of the short-term uptrend or for a reversal that pulls the market down again.