Derivatives Strategy: Nifty could fall further

The Nifty continues to be range bound but background signals suggest it is now more likely to head down, rather than up. The VIX is rising, indicating increasing nervousness among traders. Breadth is negative with advances outnumbered by declines. Volumes are middling to low. Geopolitical tensions continue. The fears are of an intensifying trade war with America taking on the world. The one positive outcome for India from this could be lower crude prices. 

The Nifty tested resistance at 10,900 unsuccessfully on June 13, topping out at 10,893. It has since fallen, to a low of 10,652 on Tuesday. This creates a falling top compared to the prior high of 10,917 on May 15. On the downside, the recent lows are in the 10,425-10,450 levels.

The support at 10,420 is just above the 200-DMA at around 10,415. The index would have to either break that support and drop below the 200-DMA to confirm a full-scale downtrend. Or it would need to climb above 10,917. It could range-trade the 10,400-10,900 zone for an indeterminate period. 

Foreign portfolio investors (FPIs) remain net, high-volume sellers. Retail investors have also sold. Domestic institutional investors (DIIs), including funds, are the only buyers at the moment. There hasn't been much good news in the last week, what with tensions on the trade front and a delay in the monsoons.

Rupee volatility will continue. FPI selling causes immediate pressure and the worsening trade balance is also cause for concern. The dollar is likely to strengthen some more, now that the Fed has signalled a willingness to hike rates at least twice more in 2018, while the ECB and the Bank of Japan are holding status quo. Trend-following signals suggest staying long on dollar. But there's a case for shorting the yen.  

The Bank Nifty is just below 26,500. A long July 26, 25,500p (146), long July 26, 27,500c (70) strangle could be hit in four or five trending sessions. The cost of this position could be reduced with short July 5, 25,500p (23), short July 5, 27,000c (11). Note the premium difference.

The Nifty is at 10,671. A long July 10,800c (88), short 10,900c (54) costs 34, pays a maximum of 66, this is 130 points from money, or two trending sessions away, given the session average swing of about 82 points. A long July 10,500p (90), short 10,400p (67) costs 23, pays a maximum 77. This is about 170 points from money. Both positions seem reasonable from the risk:reward perspective. But, the technical signals favour the bearspread.


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