The market dipped on Monday after the long Easter weekend. This confirms the intermediate pattern as negative. However, the Nifty remains above its own 200-Day Moving Average (DMA), the critical test of the long-term trend.
The key level to watch on the downside would be the low of March 28 for Nifty at 5,135. This was below the 200-DMA, as well as lower than previous lows in February-March. The market would need to drop below 5,135 to confirm a long-term bear trend.
However, it has already confirmed a bearish intermediate trend with a succession of lower highs since February 22, when it hit the 2012 top of 5,630. The next peaks have been 5,499 on March 14, and then 5,386 on March 22 and 5,379 on April 3.
So, traders should watch the levels of 5,135 and 5,379. While a fall below 5,135 would confirm a long-term bear market, a rise beyond 5,379 would suggest a bullish intermediate trend reversal. A rise beyond 5,630 would suggest a long-term bull market.
Domestic institutional investors (DIIs) and retail attitudes remain negative and foreign institutional investors (FIIs) sold on Monday. There's still a lack of clarity about details regarding new Budget provisions. The dollar-rupee rate is above Rs 51.25 and a long dollar-rupee looks a tempting trade.
In the very short-term, there is support between 5,175 and 5,225, also the zone just above the 200-DMA's current range. The daily high-low volatility rose again on Monday.
Among key subsidiary sectors, the Bank Nifty is high-beta with respect to the Nifty. It seems to have gone somewhat bearish ahead of the Reserve Bank of India monetary policy on April 17. The direction of the CNXIT is likely to be driven by the Q4 results of biggies like TCS and Infosys. Currently, the CNXIT remains above support at 6,400.
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The Nifty put/call ratio is in a reasonably healthy zone of 1.27. Option chain analysis suggests traders are expecting moves between 4,900 and 5,600 in the next 5-10 sessions. It’s still early into the settlement.
It makes sense to bet on higher volatility during the April settlement. The short-term sentiment is now bearish and so is the intermediate trend.
The long-term trend could be on the verge of going bearish and the market could drop sharply if it closes below the 200-DMA for two sessions in succession.
A close-to-money (CTM) bearspread of long April 5,200p (74) and short 5,100p (44) costs 30 and pays a maximum 70, an excellent risk:reward (RR) ratio, given an index spot-value of 5,234. If you can hold for a longer period, move further away for a long 5,100p and a short 5,000p (25), which costs 19. This would have a handsome payoff if the market broke down.
A CTM bullspread of long April 5,300c (73) and short April 5,400c (37) costs 36 and pays a maximum 64. This is also an acceptable RR. Further away, a long 5,400c and short 5,500c (16) costs 21 and pays 79.
Looking at April strangles, the RR is reasonable, almost at the money. A long 5,100p (44), long 5,400c (37) offset by a short 5,000p (25), short 5,500c (16) costs a maximum 40 and pays a maximum 60 for a one-sided move.