Rise above 5,604 will confirm uptrend

Global markets continue to remain jittery, domestic politics is also casting a bearish shadow

The market bounced from a new 2013 low of 5,604 on settlement day. The uptrend continued on Monday, albeit on reduced volumes. This may be a short-term relief rally, or the start of a new intermediate uptrend.

The global markets continue to remain jittery and domestic politics is also casting a bearish shadow. Market breadth is poor both in terms of adverse advances-declines ratios and lower volumes. The Nifty had a pattern of lower lows and lower highs between March 11 when it topped at 5,970 and March 28 when it hit 5,604. It has seen a declining trend since January 29 when it hit 6,111.

One could interpret this as an intermediate downtrend that has lasted two months or three weeks, depending on whether one takes January 29, or March 11 as the initial point. To confirm a new intermediate uptrend, the index would have to stay above 5,604 and move past resistance at 5,760, and then at 5,850.

The Nifty briefly penetrated the 200-day moving average (DMA) on settlement day before finding support. This signal is inconclusive - we cannot definitively say the long-term trend has either held to its bullish trajectory or reversed. The 5,600-5,625 level is critical - the 200 DMA is at those levels. A drop below 5,600 could mean a slide till 5,450.

Other shorter-term moving average systems are not yet signalling "buy". DMA signals are lagged, so a two-session uptrend wouldn't normally trigger buy signals. A 10 DMA versus 20 DMA crossover system is signalling sell and so is a 7 DMA versus 10 DMA crossover system.

The Bank Nifty dropped below its own 200 DMA. The Junior also dropped below its own 200 DMA. Both indices have pulled back above their respective 200 DMAs in the last two sessions but the long-term trend could be negative.

So, the breadth signals are weighted on the negative side. The three-month put-call ratio (PCR) for the Nifty options segment is hovering at 1.07 and so is the April PCR. This is just on the positive side with a PCR of one considered neutral.

There are supports and congestion points scattered at 25 point intervals across the 5,600-5,850 zone. Consensus estimates of short-term volatility would see the index moving anywhere between 5,625-5,800 in the next four sessions.

In the context of the April settlement, a big trending move is possible. So, option traders can afford to take positions at some distance from the money.

The Nifty is at 5,704 with the futures premium ranging at 20. A straddle of long 5,700c (93) and long 5,700p (70) suggests that the market is mildly optimistic because of the lower put premium. This straddle would breakeven at 5,863 or 5,537 and those are the limits of expectations in the next 10 sessions.

A long 5,800c (46) and short 5,900c (19) costs 27 and pays a maximum 73. An on-the money bullspread of long 5,700c (93) and short 5,800c costs 47. A long 5,600p (39) and a short 5,500p (21) costs 18 and pays a maximum 82 while a long 5,700p (70) and a short 5,600p cost 31 and pays 69.

The trader could take an on-the-money bearspread if he's bearish. If he's bullish, it's better to move to the long 5,800c-short 5,900c. Combining spreads into a long-short strangle position, with a long 5,600p, long 5,800c and a short 5,500p and a short 5,900c costs a net 45. This has breakevens at 5,555 and 5,845.