The short-term trend turned positive on the Budget and we have seen two good sessions since then. There are indications that the intermediate trend may also turn positive. However, the long-term trend may still be bearish and there is apparent resistance above Nifty 5,525 all the way up to and beyond, the 200 Day-Moving Average zone of 5,600-5,650.
Volumes jumped on Budget day but that was normal and could not be relied upon as a technical signal. One worrying factor is that the institutions remain lukewarm, with very small commitments in the past two sessions. The post-Budget rally appears to be driven entirely by retail, and that is unsustainable.
On the good side, we have seen a pattern of higher lows with the low of Nifty 5,177 (February 11) being topped by a low of 5,232 on February 25. This could mean a bullish intermediate trend. Any crossover and close above 5,625 would be a positive intermediate signal. An upmove beyond 5,625 could test 5,800-5,850 without really altering the long-term bearish perspective.
In the absence of institutional interest, I would see this rally purely as a trading opportunity. If the rally does fizzle, support at 5,175-5,250 will be crucial and is liable to be tested on the next downmove. Given Budget-related volatility, expect a couple of 150-point sessions and, maybe, wild intra-day swings. The Vix has fallen, which suggests premiums are understating likely volatility.
This is also a new settlement, so there is plenty of time. The open interest position in Nifty options is definitely bullish at the moment. The March call chain shows OI is focused between 5,500 and 5,800 and drops after the 5,900 level. The March put chain has a massive OI bulge at 5,300 and plenty of volume till 5,000. So, the limit of trader expectation seems to be 5,000-5,900.
Both subsidiary indices, CNXIT and BankNifty, have outperformed during the rally. BankNifty is always a potential substitute for the Nifty futures, since it is high beta. It will hit resistance at the 11,000-11,100 mark. The CNXIT has corresponding resistance at around 7,000.
In these circumstances, the trader has to reckon with several possibilities. One is a big breakout, till either 5,850-5,900 or 5,150-5,250. Another is range-trading between 5,400 and 5,600. In all cases, intra-day volatility is likely to be high — at the least, higher than the VIX implies.
A standard close-to-money bullspread with long March 5,600c (97) and short 5,700c (55) costs 42 and pays a maximum 58, while a CTM bearspread with long March 5,500p (111) and short 5,400p (79) costs 32 and pays a maximum of 68. The bearspread is much closer to the money ,and hence, seems more attractive. If you have got a bullish bias, go wider with a long 5,700c and a 5,800c (28). This bullspread will cost 27 and pay a maximum of 73.
A long strangle of long 5,700c and long 5,300p (57) is approximately zero-delta. It can be offset with a short 5,200p (40) and a short 5,800c (28) to create a long-short strangle. This costs a net 44 and it pays a maximum of 56, with breakevens at 5,256 and 5,744. It is not very high-risk even though the strikes are quite far from money due to expectations of high volatility. There is a pretty good chance of settling off with profits in both directions.
