The short-term trend turned positive on March 21 from Nifty 5,350. Since then, the market has bounced impressively. The intermediate trend appears to be positive. Resistance is being tested around the 5,800 mark. Optimists would hope that the long-term trend has also reversed with the positive signal of a climb above the 200 day moving averages.
Volumes are on the high side of normal, as expected in settlement week. The institutional attitude has improved substantially with strong FII buying in the past few sessions and a mildly bearish stance from DIIs.
Is this a rally within a long-term bear market, or a reversal to a positive long-term trend? I would suspect that it is the former – a rally driven by short-covering. The bear market that started in mid-November 2010 simply hasn’t lasted long enough for a big trend reversal.
On the upside, I’d expect the rally to terminate within 6,000-6,100 at best. and may be within 5,900. A confirmation of a new bull market would occur if the Nifty did cross 6,340, beating the November 2010 highs. On the downside, the 200 DMA should provide support between 5,600 and 5,700. Falls below 5,550 would confirm the long-term trend remains bearish. If the market range-trades, it will move between 5,550 and 5,850.
Volatility will continue, given Japan and WANA. The trader should be braced for 150-point sessions in general, and for moves between 5,500 and 6,100 in the next five-ten sessions.
The open interest position in Nifty options is bullish and carryover is decent. The overall Nifty Put-Call ratio is high at 1.75 and the March PCR is above two. The high PCR could mean a continuation of the rally till 6,100+.
The March call option chain shows OI peaking at 5,900 and falling sharply thereafter. The March put option chain has an OI peak at 5,700.
Both subsidiary indices, the CNXIT and BankNifty looked strong in the past few sessions. The BankNifty now has support between 11,400 and 11,600 and its tested resistance near 11,900-12,000. The CNXIT has support at 6,600-6,700 and resistance at 7,000. The trader must consider possibilities for the April settlement. There, the market moves could range anywhere between 5,300 and 6,200 without altering our negative viewpoint of the long-term trend. If you are focussed on settlement day, consider a long March 5,700p (5) with breakeven of 5,695, and long 5,800c (26) with breakeven of 5,826.
Either position could give a big return and a combined long-strangle costs 31 and has breakevens at 5,669; 5,831. For April, a bullspread of long April 5,900c (95) and short 6,000c (58) costs 37 and pays a maximum 63. A bearspread of long April 5,700p (78) and short 5,600p (55) costs 23 and pays a maximum 77. The bearspread has a much better risk-reward ratio. A wide long April strangle of long 6,000c (58) and long 5,600p (55) laid off with short 5,400p (27) and a short 6,200c (17) costs a net 69 and pays a maximum 131 with breakevens at 5,531; 6,069.
