Intermediate trend looks negative

The market has seen a rebound since the settlement on the back of serious institutional buying. The Punjab National Bank scam and other bank scams that are now floating to the surface seem to have been discounted. The global trading pattern has also been less volatile this week.

It's still too early to judge if this is a big trend reversal, or an intermediate correction. The Nifty is down about 5 per cent from the all-time high of 11,170, recorded in late January. But all three segments of players — domestic institutions, retail investors and foreign portfolio investors—have been net buyers in the new settlement.

The VIX has now dropped considerably, indicating that market is much less nervous. However, this could be a function of the just completed settlement and even the current surge of about two per cent may just be short-covering.

The long term trend is still counted as bullish. The intermediate trend may be negative. The supports at 10,275-10,300 level will be critical. If the index drops below that, it will probably test the 200 Day Moving Average (200-DMA), which is at 10,075-10,100. The 200-DMA would be the last reliable support for the bull market. The Index has bounced twice from 9,675, since December 2016. If the 200-DMA breaks, the 9,6759,700 region would be the next support if the 200-DMA breaks.

On the rebound, the index is testing resistance at 10,600. If there's a breakout above 10,600, the index could rise till 10,900 levels. Trend-following signals still suggest holding a sell on the Nifty with a stop at 10,700.

The downtrend in February, post-Budget, was quite strong. It was also very broad since all three investor segments sold. Corporate earnings in Q3 have been decent enough. But the downtrend has been equally broad post-Budget though smaller stocks have got hit harder. The signals out of the bond market remain negative with G-Sec yields rising.

Traders must also remain braced for currency volatility. Worries about higher oil and metals prices also continue. The dollar has surged. So, have the yen and euro. The dollar now looks set to break out above 65 so a long dollar/rupee position remains tempting.

The previous uptrend started in September 2017, from support at 9,675-9,700. In the longer-term, the Nifty moved North in December 2016, from 7,900 levels to a high of 10,550, hitting that level twice in December 2017, before correcting down and then moving to the current high of 11,170.

The Nifty Bank which crashed, has recovered from post-Budget lows of 24,825 to current levels of 25,700. A strangle of long March 28, 26,500c (132), long 25,000p (200), could be offset with a short strangle of March 8, 26,500c (27), short March 8, 25,000 p (60). This creates a position with a net outlay of 245 and breakevens at roughly 24,750, 26,750. This is a slightly asymmetric position - the put is closer to money. Either 25,000 or 26,500 could be hit in 3 trending sessions.

The Nifty closed at 10,397 just before the settlement. It has gained till 10,583 in the next three sessions. This close to settlement, the put-call ratios are still not very meaningful. Decent breadth and the uptrend suggest that the index could travel up further, however.

Look at positions roughly 200 points from money. A bullspread of long March 10,800c (54), short 10,900c (30) costs 24, pays a maximum 76 and it's about 220 points from the money. A bearspread of long March 10,400p (80), short 10,300p (59) costs 21, pays a maximum of 79. This is about 180 points from the money. The combined positions would cost 45, with breakevens at 10,845, 10,355. One or the other side, is almost guaranteed to be hit within the March settlement.