Key support for Nifty at 5,790-5,810

Credit policy could be pivotal for short-term sentiment; Bank Nifty's movements to determine the direction of overall market

The market has seen a bearish trend after the Nifty hit resistance at 5,970 and slid back. Support has held up so far between 5,790-5,820. Global sentiment has also gone bearish due to the situation in Cyprus. Private banking shares are also under pressure after the money-laundering sting from Cobrapost.

The Credit Policy could be pivotal for short-term sentiment. The Bank Nifty is high beta and financials have a big weight in all main indices. The Bank Nifty's movements will determine the direction of the overall market.

The financial index has been bearish in the short-term and mildly bullish overall since the post-Budget selloff. It has been unable to stay above resistance at 12,000. It could test its 2013 lows near the 11,450 level if the RBI decides not to cut policy rates, or the RBI cuts by a minimal amount while leaving cash reserve ratio (CRR) unchanged.

The BankNifty could push back above the 12,000 level and test resistance at 12,200-12,300 if the RBI cuts repo by a generous amount (50 basis points) and perhaps, also reduces the CRR. A high-low range of 350-400 points during tomorrow's session is quite likely.

The consensus expectation seems to be a Repo cut of 25 basis points with a CRR cut as well but there are a few optimists who are hoping for 50 basis points. A 25 bps cut plus CRR cut would probably be enough to maintain a range trading pattern, with a mildly bearish trend as over-optimistic bulls cut losses.

The Nifty's trends are difficult to read. The long-term trend must still be considered bullish since the market rallied well above the 200-Day Moving Average (DMA) after the post-budget sell off. The Nifty may be considered bullish in the intermediate term since it has managed to log successive higher lows at 5,790-5,810 level. There is also a buy signal from short-term MA systems since the 10-DMA is above the 20-DMA. The past three sessions have been bearish.

Key supports are Nifty 5,790-5,810 and below that 5,750, with a third crucial support at 5,675. A drop below 5,670 would establish a new 2013 low and probably lead to a test of the 200 DMA (at around 5,600). A breach of 5,600 would suggest a new long-term bear market.

Breadth signals are poor with midcaps and smallcaps having lost more ground than large caps. If the global situation, or the money-laundering sting or a cautious attitude on the part of the RBI or all three factors trigger another downtrend, the market could lose a lot of ground.

On the upside, the Nifty would need to cross 5,975 and close above those levels to make things more comfortable for the bullish trader. The put-call ratios are healthy. Both the three-month PCR and the March PCR are at 1.3. Consensus expectations in the next three-five sessions seem to be ranged between 5,675 and 6,050 so there is a bearish bias on the whole.

The Nifty is at 5,835. Near-the money spreads have good Risk:Reward ratios. A long 5,900c (40) and short 6,000c (14) costs 26 and pays a maximum 74. A long 5,800p (42) and short 5,800p (18) costs 24 and pays a maximum 76. The bearspread is nearer the money. Combining these two spreads into a long-short strangle position costs a net 50 and pays a maximum net 50. The combination strangle is also tempting since both sides of the strangle could be hit.