The Nifty is in a short-term downtrend. It was unable to sustain prices above the 6,000 level in Monday's session despite opening higher. There is support at current levels and below at 5,920-5,940. If the index falls below 5,920, it could slide till the 5,800-5,825 levels.
The reaction started from a high of 6,111. Successive supports have been broken in the last four sessions. The current trend reading says the short-term trend is down, the intermediate trend is uncertain and the long-term trend is up.
A pattern of lower highs and lower lows would establish an intermediate downtrend. The Nifty already has a pattern of lower lows, with the February 4 low of 5,981, versus the January 24 low of 6,007. On the upside, it would have to cross 6,111 to establish higher highs.
The intermediate trend went positive on November 20, from 5,550 levels. By January 29, when 6,111 was hit, the trend had been positive for over 9 weeks. So an intermediate trend reversal would not be surprising though unconfirmed as yet. The 20 Day Moving Average (20 DMA) is giving a sell signal, which does indicate an intermediate reversal.
The Bank Nifty has hit support at 12,550, which is a 400-point (3 per cent) down-move from its January 29 top of 12,960. If it drops below 12,450-12,500, it could slide till 12,100. The financial index has a high-beta relationship with the Nifty and it could drive the market down if it falls further.
Another point is that, if FIIs become net sellers, there will be an impact on the USDINR rate. The rupee had strengthened to below 53 on Friday and it shot back till 53.47 on Monday. There could be a long trade, backing the USD to rise some more.
However, it is possible that strong supports in the 5,940 zone will hold. In that case, the index will consolidate and move up. Pre-Budget speculation tends to be bullish in nature and it will affect the last 10 days of this settlement.
Technically, the signals suggest traders should be neutral or bearish with a 5-session perspective. The February put-call ratio is 0.99, which is bearish, and the the 10 DMA and 20 DMA are both giving sell signals. There is a need for stop-losses at say, the 6,050-6,075 level if you short the index.
The index is at 5,990. The 6,000c (78) and long 6,000p (81) have breakevens at roughly 6,080, 5,920 respectively and that is the range of current expectations for the next 3-4 sessions. In the slightly longer term of 10 sessions, a straddle of these two options with breakevens of roughly 5,840, 6,160 is the limit of trader expectations.
The February call chain has high open interest between the on-the-money 6000c (78), 6100c (38) , 6200c (15), and 6300c (5). The put chain has high OI from 5700p (9), 5800p (21), 5900p (43), and 6000p (81).
Consensus trading expectations for February are within the 5700-6300 range. The bearspread of long Feb 5900p (43) and short 5800p (21) costs about 22 and pays a maximum 78. A similar bullspread of long 6100c (38) and short 6200c (15) costs 23 with a maximum payoff of 77. Combine these two spreads and you get a long-short strangle with a cost of 45 and a possible payoff of 55 and breakevens at 5855, 6145.
