The crash on Monday was caused by panic over the European situation. Support came at the upper end of the 200-Day Moving Average (DMA) zone. Derivatives’ volumes was huge and there was a lot of selling by foreign institutional investors (FIIs).
The intermediate trend remains negative. There are successive resistances at 5,100, 5,150 and 5,200. On the downside, the exponential 200-DMA is at about 4,890, while the simple 200-DMA is at around 4,980. This zone provides critical support. If the Nifty closes below 4,850, there is a strong probability of another long-term bear market.
Open interest (OI) and carry-over seem good. The focus is strongly on index instruments. Most of the action from here till settlement is likely to concentrate on the Nifty, the BankNifty and the top 15 stock futures in terms of volumes. Volatility is likely to remain pretty high.
Among subsidiary indices, the BankNifty has key support at around 9,300 and that will be tested again. On the upside, there's resistance at 9,575-9,625. The pattern is one of lower tops and a close below 9,300 would establish lower lows with a possible slide till 9,000.
The CNXIT is also quite weak It has support at 5,650, which it has tested a couple of times. If that is broken, a drop till 5,400 is possible. The CNXIT could, however, receive support due to the factor of the weakening rupee versus the US dollar (USD).
That leads us to one possible paired trade in currency futures. It's worth considering buying the USDINR contract, while simultaneously selling EURINR. This works if the rupee continues to strengthen against euro, while weakening against the USD. However, some currency traders are expecting a technical reaction where the trends reverse temporarily.
The Nifty option trader must look at the range between 4,800 and 5,200 with a perspective of the May settlement. The Nifty's put-call ratio in terms of OI remains in the normal to bullish range of around 1.1 zone despite a drop in the put OI.
A bullspread with long 5,100c (61) and short 5,200c (26) costs 35 and pays a maximum of 65. A bearspread with long 5,000p (63) and short 4,900p (37) costs 26 and pays a maximum of 74. Both positions have decent risk-reward ratios.
A combination of the above would create a set of long-short strangles with a cost of 61 and a maximum pay off of 39. It's better to move further away and look at long 4,900p (37), long 5,200c (26) with a short 4,800p (20) and short 5,300c (9). This strangle combination would cost a net 34 and offer a maximum pay off of about 66 with breakevens near 4,866, 5,234.
