A bear market is confirmed with the Nifty falling to successive 2011 lows and breaking below its 200-day moving averages (DMA) on high volumes. The low of 5,416 on January 31 was well below the 200 DMAs (between 5,625 and 5,650).
We can expect pullbacks on short-covering as occurred yesterday to end at resistance in the DMA zone of 5,625-5,650. On the downside, if support at 5,400 is broken, the next support is 5,300-5,325.
The current intermediate downtrend started on January 3 when the market peaked at 6,180. It could last another two-six weeks and strengthen since this is an early down-wave in a new bear market. We'd expect a rally of some description before the Budget.
In the next intermediate up-move, primary resistance is at 5,625-5,650, secondary resistance at 5,850-5,900. At maximum, we'd 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 6,180+ is achieved. An extraordinary Budget may make a difference.
In a long-term bear market, expect progressively lower lows and lower peaks. Fibonacci retraction calculations based on the entire move of the previous bull market between October 2008-November 2010 offer several targets. The next retraction could go till approximately 4,900-5,000 (Fibonacci level of 37 per cent retraction) or 4,500 (50 per cent retraction) or 4,000 (62 per cent retraction).
Institutional attitudes are net bearish. The FIIs sold Rs 8,000 crore net in January while the domestic institutions bought Rs 4,000 crore. Operators and retail traders don't possess the resources to cover this deficit. Volumes and open interest are reasonable. Index put-call ratios have stabilised at reasonable levels. The VIX has jumped reflecting overall nervousness. Close to money premiums are quite high.
More From This Section
Both major subsidiary indices confirmed the bearishness by hitting new 2011 lows as well. The BankNifty has rallied on short-covering but it's likely to slide below 10,000 within February. 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.
Traders should stayed braced for moves between 5,300 and 5,700 in the next three-five sessions and expect lower values through the next 10 sessions. One step away from money, both bearspsreads and bullspreads have decent risk:reward ratios and the bearspreads are a little better.
The underlying Nifty is at 5,505. A bullspread of long February 5,600c (82) and short 5,700c (49) costs around 33 and pays a maximum of 67. A bearspread of long February 5,400p (75) and short 5,300p (48) costs 27 and pays a maximum 73.
A long-short strangle combining the above spreads costs about 60 and pays a maximum of 40 on one-sided moves to the limits. An adventurous trader could take a short straddle with short 5,500c (130) and short 5,500p (110) and lay off with a long strangle of long 5,300p and a long 5,700c. Net premium inflow is 143. This is profitable between 5,357, 5,643. The potential max loss is 57. On an up-move, reverse puts. Vice-versa, reverse calls on a down-move.