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The market bounced sharply from support at the Nifty 5,650-5,685 levels. It is back to testing resistance at 5,950-5,975 and a new intermediate uptrend may have started. The uptrend in the US markets where the Dow Jones has just pushed to new highs, led to renewed foreign institutional investor (FII) commitments in India, which was primarily responsible for the bounce.
The index is now poised at a critical level, testing resistance at 5,975. If it breaks out past that zone, it could go all the way to testing the 52-week high of 6,111 (January 29). However, there is heavy selling pressure and resistance at roughly 25-point intervals in this zone.
The intermediate downtrend started on January 30 and seems to have lasted till March 2. This five-week period may have been sufficient for a correction inside a big bull market although intermediate trends can last up to three months.
However, we don't have confirmatory signals yet of a bullish intermediate trend. A move past resistance at 5,850 and a close above those levels set up the primary signal of higher highs. But moving average (MA) systems aren't offering buy signals yet. The 10-day MA is still below the 20-day MA.
Breadth signals are also poor with top-line stocks supported by FIIs while losses accrue across mid-caps and small-caps. So, this is a critical point - the Nifty/Sensex and the Junior need to move past current levels while the advance-decline ratio should ideally improve as well.
The index would need to climb above 5,975 and close above those levels for two sessions in succession to make things look more comfortable for the bullish trader.
The next major triggers could be the RBI Credit Policy Review on March 19 and macro-trends signalled by the inflation and IIP numbers. The key financial sector index, the Bank Nifty, hit resistance at 12,300 and may trend down in the short-term to retest support at 12,850-12,950. This could mean a lack of confidence in RBI's stance. Optimists expect a big rate cut but consensus expectation is a minimum rate cut of 25 basis points in the repo.
Option traders will note that the put-call ratios (PCR) are now more healthy. The three-month PCR is at 1.5, while the March PCR is at 1.35. Consensus expectations in the very short term seem to be ranged between 5,850 and 6,050.
The index is at 5,942. Near-the-money spreads have good risk:reward ratios. A long 6,000c (47) and short 6,100c (19) costs 28 and pays a maximum 72. A long 5,900p (45) and short 5,800p (23) costs 22 and pays a maximum 78. Combining these two spreads into a long-short strangle position is tempting. There is a good chance that both sides could be hit and the payoff : net cost is 50:50.
The trader could also move one-step away from money in taking strangles since the current option premia seem to underestimate the possible volatility in the next 10 sessions. A long 5,800p (23), long 6,100c (19) and short 5,700p (12), short 6,200c (7) costs a net 22. This pays a maximum 78 with breakevens at 5,778 and 6,122. Even if this position is not hit, it could double in value on a 100-point swing in either direction.
