Technically, the divergence between VIX and the indices could be resolved in two ways. The Nifty
might bounce sharply or the VIX may spike as the monthly settlement approaches. Session volatility has eased after a big spike around the Budget.
By definition, this remains a big bull market but there’s been a retraction from the highs of 12,103 to around the 11,450-11,475-mark. There’s support in this zone. If the Nifty
drops below 11,450, it could travel down to the 11,100-11,200 zone. That is critical since the 200-day moving average is trading in that zone. A fall below 11,100 would imply a new long-term bear market.
If there’s a bounceback, the index will face heavy resistance in the 11,800-11,900 range. Apart from technical congestion over the last year, this is the pre-Budget level and investors will cut their losses if the market rises.
The Bank Nifty
lost more ground than the Nifty on Monday. This has some bearish implications for the broader market. The Bank is at about 30,450 now. A strangle of July 25, long 31000c (85) and long 30000p (108) costs about 193. This can be offset by a short July 18, 30000p (35), short 31000c (20) to reduce net cost to about 138. The breakevens are 29,862, 31,138, assuming losses on shorts are offset by gains in long positions.
The Nifty is at 11,588. A bull spread of long July 25, 11700c (37), short 11800c (15) costs 22 with maximum gain of 78. A bear spread of long July 25, 11500p (53), short 11400p (27) costs 26, maximum gain of 74. The combined spreads have a net cost of 48, with breakevens at 11,452, 11,748. For a strike, we need a movement of 150 in either direction. The average session high-low range (past 10 sessions) is 114.