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The Budget seems to have broken the uptrend in the stock market. It is too early to judge if this is a big trend reversal or merely a short-term correction. The Nifty has lost four per cent in the three sessions since Jaitley made his speech. Of the three segments of players — domestic institutions, retail investors/traders and Foreign Portfolio Investors (FPIs) — the first two have been net sellers and the FPIs are only moderate buyers. Option premiums remain high and the VIX is rising, indicating the prospect of volatility and a bearish outlook in the next few sessions.
The cautious trader will normally wait out the Budget session before committing to a large position in either direction. Historical data suggests trends tend to get firmly established and it is safer to wait out that session and take positions over the next two ones. By that thumbrule, the market is now in a downtrend.
The long-term trend should still be counted as bullish. The market broke down from the high of 11,170. The Nifty has, so far, tested support at 10,585-10,600 from where it bounced on Monday. The pullback would acquire serious dimensions if the Nifty slid below 10,450-10,500, which is the level from where the most recent breakout came. Below 10,450, the next key support would be at 10,325. The 200 Day Moving Average is at around 10,025-10,050, which would be the last level of reliable support for the bull market.
Until the Budget, domestic institutions, FPIs, and retail investors, had all been strongly bullish in 2018. This resulted in a broad uptrend across most sectors, and stocks of all types of market cap. Corporate earnings in the December quarter have been decent so far. By definition, the long-term and intermediate trends should still be accounted up, though the short-term is down. Trend following signals suggest selling the Nifty with a stop at 10,850.
Traders must also remain braced for currency volatility. Worries about higher oil prices continue. The dollar had lost a lot of ground but it has rebounded since the Budget. The yen and euro might also strengthen, if the RBI maintains status quo in its policy review this week.
This uptrend started in late September from support at 9,675-9,700. The 200 Day Moving Average is now around 10,050. 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 index has bounced twice from 9,675, since December 2016.
It could be hit in three or four trending sessions. If this is taken and the Feb 15, short 25,000p (60) and Feb 15, short 27,000c (62) is sold, the calendar spreads costs a net 130, with breakevens at 27,130, 24,870. This long-short position could give a big payoff if the financial index stays volatile.
The Nifty closed at 10,666 on Friday. A bullspread of long Feb 10,900c (52), short 11,000c (32) costs 20, pays a maximum 80. This is 240 points from money. A bearspread of long Feb 10,500p (68), short 10,400p (49) costs 19, pays a maximum of 81 and is 166 points from money. The bearspread has a better risk-reward ratio. A wide strangle of long 11,000c (32), 10,300p (36) is tempting. This is zero-delta and one side could be hit if the volatility continues.