Immediate support level at 5,175-5,225

The Congress' setback in the assembly elections prompted bearishness. Volatility jumped. The short-term trend is down. Ditto the intermediate trend. The long-term trend's direction is likely to be tested this week.

The Nifty is very close to its 200-Day Moving Average (DMA), somewhere between 5,125 and 5,175, depending on the method of calculation. If it drops below the 200-DMA, we'll have to write off the rise through January-February, as a bull-trap in the middle of a big bear market.

Foreign institutional investors (FIIs) have sold in the past two sessions, going by anecdotal evidence. They started lightening up on rupee debt last week. Coupled with demand from oil importers, this could push the dollar-rupee rate below 51 - long dollar/rupee is a tempting trade. Domestic institutions and retail have been consistently negative and turned more bearish yesterday.

The immediate support level is 5,175-5,225. If that is broken, the market would drop below its own 200 DMA. Rebounds could occur till 5,400-5,500 before hitting heavy resistance. Given weak short-term and intermediate trends, a breakdown below the 200 DMA seems very probable.

The daily high-low volatility has jumped and so have option premiums. The Budget is the next news trigger. As of now, sentiment is negative and breadth poor. Among subsidiary sectors, the CNXIT is holding above support at 6,500, with the next support at 6,300.

The Bank Nifty is losing ground. The financial index is high-beta with respect to the Nifty. It could drop till the 9,700-mark if the bearishness continues. Telecom, metals and mining stocks are other sensitive sectors.

The Nifty put call ratio has corrected to around 1.25, which is a normal level. Option chain examination shows March call open interest is very high at 5,400c (76), 5,500c (47) and 5,600c (27), with ample liquidity below 5,200c (167) and 5,300c (116). The March Put open interest (OI) peaks at 5,200p (119), with ample OI also at 5,100p (82), 5,000p (54) and 4,900p (35).

Traders focused on the pre-Budget period should be looking at the range of 4,900-5,500. Daily ranges of 125-150 points are likely and it would take just two big trending sessions to hit either end of this range. The settlement is long enough to see even larger swings, post-Budget.

Premiums are high. A close to money (CTM) bearspread of long 5,200p and short 5,100p costs 37 and pays a maximum 63. This is a reasonable risk-reward ratio (RR). A CTM bullspread of long 5,300c and short 5,400c costs 40 and pays a maximum 60. This is also a decent RR.

One step further away, a long 5,400c and short 5,500c costs 29 and pays a maximum 71, which is good. Similarly a long 5,100p and short 5,000p costs 28 and pays 72. Note the spot value of 5,222 is closer to the bearspreads so it's not a zero delta situation.

Looking at March strangles, the RR is adverse even for a long 5,100p (82), long 5,400c (76), short 5,000p (54) and short 5,500c (47). This costs net 57 and pays a maximum 43. Personally, I'm bearish and tempted by a deep bearspread of long 5,000p (54), short 4,900p (35) combined to a long 5,600c (27). This costs a maximum 46. It could pay 54 if the market falls till 4,900. On a rise, the 5,600c will rise in value and cut losses a little.