Don’t miss the latest developments in business and finance.

Break below the 200-DMA will bring long-term bull market under question

Devangshu Datta
Last Updated : Apr 29 2015 | 11:43 PM IST
The bearish trend continued. The Nifty fell below its own simple 200-day moving average (200-DMA) on Monday and also showed other signs of bearishness. Short-covering related to the settlement could pull the trend around temporarily. But it will require a change in institutional attitude to take the market into a bullish phase again.

Take a look at post-Budget trading. There was a nine per cent correction from 9,119 (peak March 4) to 8,269 (low on March 27). This was followed by a seven per cent recovery to 8,844 (peak on April 15), and the current downtrend has seen a correction of over 10 per cent to 8,185 (low on April 28).

This is a clear pattern of lower peaks and lower lows, coupled to intra-day breaches of the 200-DMA, without settling clearly below. Obviously, the intermediate trend is negative. The benchmarks to watch would be above 8,844 (for higher peaks) on the upside and below 8,185 (for lower lows) on the downside.

One fear is that there is generally a lot of stop-losses clustered below the 200-DMA and the breach could trigger sustained selling. On the other hand, there is also substantial support around the 200-DMA and the index seems to be testing that support. There had not been a clear breakdown below the 200-DMA.

If there is such a breakdown, it would call the long-term bull market into question. Breadth is negative and volumes have been moderate. This zone has been heavily traded and there is congestion at every 50-point interval.

The domestic triggers remain hard to assess. There are Q4 results. Plus, Parliament is in session and that could mean unpredictable news-based triggers. A resolution of the MAT demands on FIIs would mean the return of some optimism and positive sentiment from them. If we account for the Sun Pharma action, the net FII attitude has involved heavy selling in April.

There are also external fears, such as the possibility of a Greek exit or a debt default. The Sterling, and UK markets could be very volatile, as Britain heads into general elections. There is some pressure on the rupee as FII inflows reversed. Crude prices have also spiked up and that could be cause for some worry. A long USDINR and even a long Eur-INR could be profitable if an over-valued rupee corrects down. The information technology (IT) industry is not going to do well in Q4 going by results of several biggies. That definitely impacts sentiment negatively.

The Bank Nifty slid below 18,000 before it made a partial recovery till 18,200-18,300. The pattern here still looks negative and we could see the PSU banks take a hammering if results are below expectations.

The Nifty's put-call ratios (PCR) are not good indicators so close to settlement. But the PCRs are massively bearish for what it's worth at around 0.7. The May Call chain has open interest (OI) peaking at 8600c, 8800c and 9000c. The May Put OI is ample between 8000p-8500p with peaks at 8000p, 8300p and 8500p.

The index was held at 8,230. A bullspread of long May 8400c (101), Short 8500c (65) costs 36, with a maximum payoff of 64. A bearspread of long 8100p (80), short 8000p (56) costs 24 and has a maximum pay of 76. The bearsspread is much closer to money, indicating that premiums are very skewed. We could combine these two spreads for a combination of long, short strangles at a cost of 59, with maximum payoffs of 41. However, it may be sensible to wait until Monday when premia will settle down slightly after a long weekend.

Also Read

First Published: Apr 29 2015 | 10:45 PM IST

Next Story