The short-term trend has slipped but the intermediate and long-term trends are unclear. The market was unable to cross resistance at 5,950. On the downside, it has key support between 5,600 and 5,700, where the 200 Day Moving Averages (DMA) are placed.
If that support holds, the signal is positive for the long-term and intermediate trends. Volumes have dropped a bit and the advance-decline ratio is negative. The institutional attitude is not clear with FII selling yesterday and muted DII buying.
The confirmation of a new bull market would be a peak above 6,340, which seem unlikely now. The signals and chart patterns suggest this is a rally inside a long-term bear market. The bearishness started with a slide from the peak of 6,338 in November 2010 and it hasn’t lasted long enough to be played out.
However, the 200 DMA is likely to be a powerful support even if it does break. There could be a period of range-trading between 5,600 and 5,800. A fall below 5,600 would confirm that the long-term trend remains bearish and if so, we’d expect the 2011 low of 5,177 to be tested, sooner or later.
The Nifty option open interest position remains bullish. But there’s some signs of uncertainty. The April put call ratio (PCR) is at 1.1 which is on the low side of normal. Mid-month onwards, the PCR is above 1.7 which is quite high. One interpretation would be that a May rally is likely.
Trend-following MA systems, which were giving buy signals last week, are now in sell mode. Intra-day volatility is likely – the VIX is rising as the index falls. The trader should therefore be prepared for 150-point swing sessions.
The April call chain has a huge open interest (OI) bulge at 6,000c, with smaller bulges at 5,800c and 5,900c suggesting high resistance above the 6,000c breakeven of 6,020+. The April put chain has an OI peak at 5,700 and another bulge at 5,400. The 5,700p breakeven is at 5,650 – in the middle of the moving-average support zone, so it reinforces that signal. Consensus trader-expectation is around 5,650-6,020 with some bears expecting a fall below 5,400. If the 5,650 support is broken, there could be a rapid decline of another 250 points.
Both CNXIT and BankNifty have weakened along with the Nifty. The BankNifty is now testing support between 11,500 and 11,600 and if 11,500 is broken, it could drop till 11,100. The CNXIT is testing support between 7,050 and 7,250 and a drop below 7,050 could mean a move till 6,800.
Between now and settlement, consider a move between 5,600 and 6,050 likely and a fall till 5,400 as quite possible. A long April 5,800c (86) and short 5,900c (44) costs 42 and pays a maximum 58. A long April 5,700p (50) and a short 5,600p (28) costs 22 and pays a maximum 78. The bearspread has a much better risk-reward. Even an in-the-money bearspread of long 5,800p (85) versus short 5,700p (50) has a better payoff than the close to money bullspread.
A long strangle at 5,900c (44) and 5,600p (28) can be laid off with a short 5,500p (14) and short 6,000c (20). The net cost of this position is 38 with breakevens at 5,562; 5,938. It has a pretty decent risk-reward ratio for a strangle that gives two-way cover until April 28.
