Intermediate trend down, resistance between 5,925 and 5,965

The market may have stabilised after hitting lows at 5,850 last week. However, it has not made a definitive recovery and the trend is indeterminate. There could be a pre-Budget rally or the market might range trade until the Budget is announced. Support held between Nifty 5,850 and 5,875. On the upside, there is resistance between 5,925 and 5,965. The short-term trend is indeterminate. The intermediate trend may still be down. The long-term trend should still be up.

The reaction started from a high of 6,111 on January 29. A pattern of lower highs and lower lows has been established to confirm an intermediate downtrend. The recent low is 5,853. On the upside, above 5,945, there is resistance at 25-point intervals. The index would have to cross 5,970 to break the pattern of lower lows and confirm a change in the intermediate trend. A dip below 5,850 could drag the Nifty down till 5,750.

Intermediate trends can ease off within two-three weeks or continue for months. This intermediate trend appears to be a reaction against the prevailing long-term trend and that makes it more likely to ease quickly. If it is a correction, it could have eased off. The 20-Day Moving Average (20-DMA) and the 10-DMA are both still in sell mode.

The Bank Nifty is also trending sideways below resistance at 12,500 and above support at 12,275. The financial index could drop till 12,100 if the support of 12,275-12,325 breaks. A recovery above 12,550 would be a positive signal.

So far, FIIs have remained net buyers and they've held their positions until end of last week. Their support is likely to be critical. If FIIs turn net sellers, there will be an impact on the USDINR rate as well as the stock market. The USD has already strengthened against INR and it could run up further, making a long USDINR position seem attractive.

The key to a turnaround may be pre-Budget speculation. That will be the major influence in the last 10 days of this settlement and if it's bullish, it could push the market back beyond the 6,000-level.

Technically, most signals suggest traders should be neutral or bearish. As mentioned above, short term MA-based systems are in sell mode, and a new 2013 low was established last Friday. The Nifty put-call ratio is also bearish for the February series at 0.95. The three month PCR is at 1, which is also on the cusp of bearish or neutral.

The index is at 5,900. A straddle of long 5,900c (56) and long 5,900p (53) costs roughly 109 and the breakevens at 5,790, 6,010, would be the limit of trading expectations in the week. The February call chain has high open interest at the 5,900c (56), 6,000c (21), 6,100c (6) and 6,200c (1.5). The put chain has high OI distributed across the 5,700p (5.65), 5,800p (19) and 5,900p (53).

Expiry effects are evident. A great deal of volatility is likely at the end of settlement since it coincides with the Budget. The on-the-money bearspread of long February 5,900p (53) and short 5,800p (19) costs 34 and pays a maximum 66. An on-the-money bullspread of long 5,900c (56) and short 6,000c (21) costs 35, with a maximum payoff of 65. Better returns may be available if you move slightly away from money. A long straddle on-the-money at 5,900, can also be combined to a short 5,800p and a short 6,000c to create a position which costs 69 and pays a maximum 31.