The market dipped on Friday but net movement in the last five sessions is negligible. Most traders are waiting for the credit policy to decide the short-term direction. The consensus expectation is of 25 basis points repo cut, and that is discounted. If the central bank announces a bigger rate cut or a big CRR cut, it may have a positive effect. If there is no cut, the effect is likely to be bearish.
As of now, the intermediate pattern is negative. However, the Nifty remains above its own 200-Day Moving Average (DMA), which is a test of the long-term trend. The key level to watch on the downside is the low of March 28, at Nifty 5,135. This was below the 200-DMA. The market would need to drop below 5,135 to confirm a long-term bear market.
The key high is 5,379, which is the high of April 3. If the market beats 5,379, it would break the bearish pattern of lower lows. The trend will remain indeterminate, if the Nifty range trades between 5,135 and 5,379. A rise beyond 5,630 to a new 2012 high, would mean a long-term bull market.
Domestic institutional investors (DIIs) and retail attitudes remain negative. Foreign institutional investors (FIIs) have been net sellers through the past five sessions. The dillar/rupee rate is now above Rs 51.65 and a long dollar-rupee looks quite tempting. So, the overall institutional position remains negative.
In the very short -term, support between 5,175 and 5,225 has been tested without breaking. This is a critical zone, just above the 200-DMA's current value. The daily high-low volatility has been quite low and it's likely to rise once the credit policy is announced.
Among key subsidiary sectors, the Bank Nifty is high-beta with respect to the Nifty and obviously sensitive to the credit policy. It is range-trading between 10,150 and 10,500. Breakouts could move it to either 10,800 or 9,750. The CNXIT has gone quite bearish after Infy's Q4 result and guidance.
If TCS results don't reverse the trend, CNXIT could be a drag on the overall market. Both real estate and auto stocks may also respond sharply to a credit policy surprise.
The Nifty put call ratio has got worse but it's still in a healthy zone at 1.1. Option chain analysis suggests that traders are expecting moves of anywhere between 4,900-5,600 in the next 5-10 sessions.
There are still quite a few sessions till settlement but expiry effects are visible. It makes sense to bet on higher volatility. The market could drop sharply if it closes below the 200-DMA for two sessions in succession. It could also jump if it clears 5,380.
A close-to-money (CTM) bearspread of long April 5,200p (60) and short 5,100p (32) costs 28 and pays a maximum 72, which is an excellent risk:reward (RR) ratio, given an index spot-value of 5,226. If you can hold till the end of settlement, move further away for a long 5,100p and a short 5,000p (16), which costs 16. This would have a handsome payoff of 84 if the market broke down.
A CTM bullspread of long April 5,300c (54) and short April 5,400c (23) costs 31 and pays a maximum 69. This is also an acceptable RR. Further away, a long 5,400c and short 5,500c (8) costs 15 and pays 85.
Looking at April strangles, the RR is reasonable, at the money. A long 5,200p (60), long 5,300c (54) offset by a short 5,100p (32), short 5,400c (23) costs a maximum 59 and pays a maximum 41 for a one-sided move. This is guaranteed to be struck if there's a 100-point session and it may be hit on both sides.
