Intermediate trend may still be negative

The stock market bounced on Monday as sentiment apparently improved. The Nifty climbed almost two per cent to lift above its own 200-Day Moving Average (200-DMA). It is not clear how much of this rise was triggered by short-covering. Provisional trading numbers suggest institutional buying was token. Much of the rise was driven by operators and retail investors closing positions. Volumes were reasonable and advances far outnumbered declines.

It will require sustained institutional buying to pull the market into a clearly bullish phase again. This rally started from a low of 8,144 on Thursday. It tested resistance at 8,350 before closing out at 8,332 on Monday. The new settlement has led to increased future premium over spot. The May Nifty was held at 8,381.

There is resistance at every 50-point interval on the upside. The index would have to push past 8,850 (the last peak of April 15 was 8,844) to generate higher highs. Ideally, it would have to beat the all-time high of 9,119 to confirm the big bull trend. On the downside, the benchmark is 8,144. On the next correction, the index should stay above 8,144, and above the 200-DMA.

As it stands, we had a pattern of lower lows and lower highs and a break below the 200-DMA last week, before the bounce on Monday. The short-term trend is up. But the intermediate trend may still be negative. The long-term trend is difficult to determine - the next peak and the next low may together offer some clarity. As of now, the long-term trend could have gone negative or we may see range trading.

The Q4 results are continuing to flow. Plus, Parliament is in session. That means plenty of daily triggers for sentiment. A resolution of the MAT demands on FIIs could mean the return of a strong sense of optimism. There are also serious external fears, such as the possibility of a Greek exit from the euro, or a debt default. The pound sterling, and UK markets in general, could be very volatile as Britain heads into general elections. However, the US Fed won't revise dollar rates in a hurry, given a slowdown in the US. Crude prices have spiked up and that could also be cause for worry. A long USDINR and even a long EURO-INR could be profitable if an over-valued rupee corrects down.

The Bank Nifty slid below 18,000 before it made a partial recovery till 18,500. The pattern here also remains difficult to read. A wide strangle of say long 19,000c (257) and long 18,000p (207) could work but the breakevens are very wide at 17535, 19465. A trader would have to hold till late into the settlement and hope for a big swing.

The Nifty's put-call ratios are back in the positive zone. The May Call chain has open interest (OI) peaking at 8,600c, 8,800c and 9,000c. The May Put OI is ample between 8,000p and 8,400p.

It's early in the settlement and the trader could hope for a pretty large movement in either direction, or perhaps both directs. A bullspread of long May 8,400c (125), short 8,500c (82) costs 43, with a maximum payoff of 57. A wider bullspread of long 8,500c, short 8,600c (51) costs 30 and pays a maximum 70. This is attractive. A bearspread of long 8,300p (107), short 8,200p (76) costs 31 and has a maximum payoff of 69. This is good given that it's only 30 points off money. A wider bearspread of long 8,200p (76) and short 8,100p (52) cost 24 and pays a maximum 76. It still seems early for strangles. The long 8,200p, long 8,500c, short 8,100p, short 8,600c costs 55 and pays a max 45.