Intermediate trend seems bearish

The market continues to have a downward bias. While the Nifty has lost 1.8 per cent, other indices, such as the Junior and the CNX500, have lost a lot more ground. The volatility in the Nifty in terms of net daily changes has dropped deceptively.

The intermediate trend seems bearish. There have been falling tops with a 52-week high of 6,229, followed by a high of 6,125, and then a high of 6,011. There have also been lower lows of 5,910 in May and 5,857 in June. The intermediate trend would first have to beat 6,011, and then 6,125, and finally cross 6,229 to confirm a new uptrend. On the downside, the defining level would be support at 5,850. A fall below that could lead to a test of 5,775, though there is support at every 25-point interval.

Short and medium-term Moving Average (MA) systems are signalling sell with the Nifty trading below its own 50 day MA, and its own 20DMA and 10DMA. MAs don't offer very reliable signals, given the drift down. The Nifty is also above its own 200 DMA (around 5,790), which is an indicator of a continuing long-term bull market.

Breadth is worrying. The advance-declines ratio has been quite negative. Apart from the Junior and the CNX500, the high-beta Bank Nifty has also lost more ground. The Bank Nifty tested support at the 12,000 mark yesterday, and a fall below 12,000 could take it down till the 11,750 mark.

One negative factor has obviously been the fear of the US Federal Reserve tapering its Quantitative Easing programme. The dollar has shot to an all-time high versus the rupee. Technical signals suggest the dollar could rise further. This has meant a counter-cyclical gain by information technology (IT) stocks and the IT majors could provide some hedging possibilities if the rupee continues down.

Domestic macro-economic data, such as the IIP and the WPI, are expected this week. The Reserve Bank of India's (RBI's) next credit policy review is on Monday. There are genuine fears the central bank won't cut rates due to the currency weakness. These fears may be exaggerated - on balance, the RBI is likely to make some sort of token cut. Political volatility is also definitely on the cards.

Index volatility could rise on newsflow regardless of direction. There could be a positive bounce and an intermediate trend reversal if the credit policy and the inflation and Index of Industrial Production (IIP) numbers are all aligned in the right directions.

  The Nifty's put-call ratio remains neutral, and, on the edge of bearish, at 1.3. A look at the Open Interest clustering across the option chains suggests the bulk of expectations run between 6,200, or 6,300 on the upside, and 5,500-5,600 on the downside. That's a wide range of 350-plus points in either direction from current levels. It suggests that June could end up being a big swing month.

Option spread risk:reward ratios are acceptable right on the money. A bullspread of long June 5,900c (88) and short 6,000c (48) costs 40 and pays a maximum 60. A bearspread of long 5,900p (96) and short 5,800p (56) has a similar risk:reward ratio. Given a Nifty spot value of 5,878 and a futures value of 5,906, either or both these spreads could be struck.

A trader looking for a two-way position can also move a step away from money. This means taking a long 6,000c, long 5,800p offset with a short 6,100c (23) and a short 5,700p (31). This combination costs 50 and pays 50 with break-evens at 5,750 and 6,050.