The intermediate downtrend remained in force until February 4, with Nifty hitting a new low of 5,369. There may have been a double-bottom formation on February 7, with the index testing support at 5,375 before it made a small recovery to closing values of 5,395.
Since the 200-Day Moving Averages (DMA) have been decisively broken, we already know it’s a long-term bear market. Pullbacks could end at resistance in the DMA zone of 5,625-5,650. On the downside, if support at 5,375 is broken, the next support would be around 5,300-5,325.
The current intermediate downtrend started on January 3, when the market peaked at 6,180. It could last another 2-3 weeks. But we would expect a rally of some description before the Budget. In the next intermediate upmove, primary resistance is at 5,625-5,650 and secondary at 5,850-5,900. At the most, we would expect a halt in the 5,850-5,900 zone. There would be hope of an end to long-term bearishness, only if a new 2011 high of over 6,180 is achieved.
Since we are expecting progressively lower lows and lower peaks, it is useful to make Fibonacci retraction calculations. Based on the entire bull market between October 2008 and November 2010, we can offer several targets. The next retraction may drop till approximately 4,900-5,000 (Fibonacci 37 per cent retraction) or 4,500 (50 per cent retraction) or 4,000 (62 per cent retraction).
Institutional attitudes remain net bearish — perhaps, an extraordinary Budget will lead to a change in attitudes. Volumes and open interest are reasonable. Index put-call ratios have stabilised at reasonable levels, though they still indicate some bearishness to come. The VIX has jumped, reflecting an overall nervousness. Close to money (CTM) premiums are quite high and CTM put premiums are higher than CTM calls.
Of the major subsidiary indices, the BankNifty has rallied somewhat on short-covering, but it is likely to slide below 10,000 within February, if it slips below 10,250. The CNXIT could find support in the 6,500 zone. As of now, both indices appear worth shorting, though the CNXIT may provide a counter-weight if the rupee tumbles further.
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Traders should stay braced for moves between 5,200 and 5,650 in the next 3-5 sessions and expect lower values until the last 5-10 sessions of the month. Settlement on February 24 could come with a rally, if there are good omens about the Budget. One step away from money, both bearspsreads and bullspreads have excellent risk-reward ratios.
The underlying Nifty is at 5,395. A bullspread of long February 5,500c (52) and short 5,600c (26) costs around 26 and pays a maximum of 74. A bearspread of long February 5,300p (67) and short 5,200p (40) costs 27 and pays a maximum of 73.
A long-short strangle combining the above spreads costs about 53 and pays a maximum of 47 on one-sided moves to the limits. This is tempting. A “zero-delta” trader could also take a short straddle with short 5,400c (106) and short 5,400p (94) and lay off with a long strangle of long 5,200p and a long 5,600c. Net premium inflow is 133. This is profitable between 5,267 and 5,533. The potential maximum loss is 67. On an upmove, reverse the puts. Vice-versa, reverse calls on a downmove.