Nifty: Downside support at 10,420, well above 200-Day Moving Average

The Nifty is uncertainly poised but the background signals seem to be negative. The hung Karnataka assembly results were not to the market’s taste and the BJP’s failure to put together a government triggered bearish sentiment. After that, geopolitics has taken over, with higher crude prices and a political crisis in Italy, causing a correction.

The Nifty has now etched out a sequence of falling tops though support has held well above the index's 200 Day Moving Average. The index hit a high of 10929 on May 15, before the BJP's inability to score a majority in Karnataka became obvious. That was a falling top with respect to the all-time high of 11170.  The market has since bounced from lows at the 10420 level in two successive sessions and it has hit a high of 10717 before correcting again in the past two sessions. That's three successive low peaks.

On the downside, the recent support at 10420 is well above the 200 DMA at around 10325.  The market would have to break that support and drop below the 200 DMA to confirm a full-scale downtrend. It could also range-trade the 10400-10900 zone for an indeterminate period.

The May settlement saw zero net movement even though the index traversed quite a wide range. The Nifty price-line take by itself is indeterminate, suggesting the market could go either way. The VIx is also not very high.

However, many background signals are negative. The ratio of advances to declines is negative. Mid-cap and small-cap indices have lost far more ground than the Nifty. Volumes have tended to be higher on downtrending sessions.

The FPIs have sold equity in massive quantities through April and May and they have also sold rupee debt in even larger volumes. That's one reason why the rupee has slid quite sharply. Retail investors have also sold. Only Domestic Institutional Investors are keeping the largecaps afloat with their buying.

The rupee could continue to see volatility with a snapback if crude prices ease up or the FPIs reverse their stances. However, trend-following signals suggest staying long on USD and long on the Euro as well, since yields are rising in both those regions.

June will see a continuation of results season. By and large, results have been good with profit expansion. However, the banking sector has seen terrible results with almost every bank seeing significant deterioration in its NPA position. The market is reading this as reasonably positive, assuming that unrecoverable debt is being flushed out. But the worst may not be over.

The RBI's Monetary Policy review next week could have a bearish impact. The central bank is likely to be nervous about rising inflation and a weaker rupee. The Committee will certainly not cut rates and it might just decide to hike rates.

 This could have a bearish effect, especially on the financial sector.  The Bank Nifty has been hovering just above 26000.  

A long June 25000p (90) , long June 27000c (148) strangle could be hit with four trending sessions in either direction. The cost of this position could be reduced with a short June 07, 25000p (17), short June 07, 27000c (32).  

The Nifty is being held at around 10615. A long June 10800c (60),  long June 10400p (74) could be offset with a short 10200p(39), short 11000c (20). 

This long-short strangle combination costs 75 and it would pay a maximum of 125 if either 10200 or 11000 was struck in June.  These strangles are pretty close to zero-delta but the premiums are asymmetric.

The usual short-term trades of short June 10800c, short June 10400p for a couple of sessions around settlement is possible. If the market doesn't swing much, premiums will move lower by Monday.