The short-term trend has turned negative and the long term remains bearish. The intermediate trend is probably negative, but this cannot be confirmed yet. Resistance between Nifty 5,525 and 5,550 could not be broken and the market has headed down in the past three sessions.
Right now, it is clinging to a precarious support at 5,300-5,350. Volumes are normal. The institutional attitude has turned negative in the wake of the Wana and Japan crises and the rupee dropped before stabilising at lower levels on FII sales. Technically, if this is a new intermediate downtrend, we would assume that support will be tested down to 5,175 and may be broken to establish new 2011 lows.
On the upside, resistance at 5,575 would need to be tested or broken for one to hope for a new intermediate uptrend. There are also chances that the market will range-trade 5,200-5,500 until the end of the settlement.
Volatility will continue, given Japan and Wana — expect 150-point Nifty sessions. The chances of an upside breakout past 5,575 look bleak in this settlement at least. But, it cannot be completely ruled out if there is a fast resolution to either Libya or Japan. The 200 DMAs have slid lower on the downtrend and that confirms a deep bear market.
The open interest position in Nifty options is bullish but it has deteriorated. The overall Nifty Put-Call ratio is 1.1. The carryover is average, with less than 10 sessions to go. The relatively high PCR could mean a short-covering snap-back till 5,550-5,600.
The March call option chain shows OI peaking at 5,500 and falling off beyond 5,700. The March put option chain has OI peaking at 5,300 but there is ample OI till around the 5,000 level. The limit of short-term trader expectation is 5,000-5,700, with consensus expecting a range between 5,200 and 5,600..
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Both subsidiary indices, the CNXIT and BankNifty looked quite weak. The BankNifty is now trading down with support at 10,600 and resistance at 10,850. It could see a breakdown till 10,250 by settlement while the upside is probably capped at 10,900. The CNXIT is range-trading 6,450-6,700. The CNXIT could rise if the rupee drops further, but if support at 6,400-6,450 is broken, it could drop till 6,100.
A trader must consider three possibilities. One is range-trading between 5,200 and 5,500, the second and third are breakouts or breakdowns, till either 5,000, or 5,700. In all cases, intra-day volatility is likely to stay high. This close to settlement, take positions near the money.
A standard close-to-money bullspread with long March 5,400c (80) and short 5,500c (40) costs 40 and pays a maximum 60. A CTM bearspread with long March 5,300p (64) and short 5,200p (37) costs 27 and pays a maximum of 73. The bearspread has a much better risk-reward ratio and, hence, seems more attractive.
A long strangle of long 5,500c (40) and long 5,200p (37) is approximately zero-delta. It can be offset with a short 5,100p (14) and a short 5,600c (15) to create a long-short strangle. This costs a net 48 and pays a maximum of 52 with breakevens at 5,152 and 5,548. While it looks 50:50 in terms of risk:reward, there is a good chance of settling off with profits in both directions.