The market has seen little net change since the Budget. However, on March 28, one day before settlement, the Nifty dipped below its own 200-Day Moving Average (200-DMA). On the settlement itself, it made a strong recovery. The intermediate trend appears bearish. The short-term trend is mildly bullish, or indeterminate. The long-term trend is an enigma.
The low of March 29 of Nifty 5,135 was below the 200-DMA and also, lower than the multiple previous lows in the region of 5,170. The high of 5,499 on March 14, was a lower mark than the previous high of 5,630 on February 22. This sets up a pattern of lower highs and lower lows, which marks a bearish intermediate trend. The Nifty has seen a rebound to beyond the 5,300 levels however, so the breach of the 200-DMA wasn't definitive.
Watch the levels of 5,135, 5,499 and 5,630. A fall below 5,135 would confirm a long-term bear market. A rise beyond 5,500 would suggest a bullish intermediate trend. A rise beyond 5,630 would suggest a long-term bull market.
DIIs and retail attitudes are negative. FII buying has slowed though it's net positive. There's likely to be a fair amount of fence-sitting until the new tax code is clarified. The dollar-rupee rate is above Rs 51 and a long dollar-rupee remains a tempting trade.
In the very short-term, 5,175 is a support and 5,400 is a resistance. The daily high-low volatility has dropped with a couple of tightly ranged sessions since settlement. Among key subsidiary sectors, the Bank Nifty is high-beta with respect to the Nifty. It will hit resistance between 10,450 and 10,650. The CNXIT has held up better, remaining above support at 6,400. Smaller stocks have been hit by low volumes.
The Nifty put call ratio (PCR) is back in a more healthy zone of 1.25. Option chain analysis suggests that traders are expecting moves of anywhere between 4,900 and 5,600 in the next 5-10 sessions. It's still early into the settlement so there are imperfections and spotty liquidity.
It makes sense to bet on higher volatility sometime during the April settlement. The short-term sentiment is mildly bullish as mentioned above, while the intermediate and long-term trends are bearish. Triggers like IT notifications, the Reserve Bank of India credit policy, and external factors like crude oil prices could induce big swings in either direction. April could be a swing month, with the market moving 10 per cent, up or down.
A close-to-money (CTM) bearspread of long April 5,300p (85) and short 5,200p (54) costs 31 and pays a maximum 69, which is an excellent risk:reward (RR) ratio, given an index spot-value of 5,318. If you can hold for a longer period, move further away for a long 5,200p and a short 5,100p (34), which costs 20.
A CTM bullspread of long April 5,400c (80) and short April 5,500c (43) costs 37 and pays a maximum 63. This is an acceptable RR. Further away, a long 5,500c and short 5,600c (20) costs 23 and pays 77.
Looking at April strangles, the RR is reasonable, slightly away from money. A long 5,100p (34), long 5,500c (43) and short 5,600p (20), short 5,000c (21) costs a maximum 36 and pays a maximum 64 for a one-sided move.
