Last year's bull market may be over

The market has a downside bias but it has seen alternating crash and recovery sessions. A great deal of May open interest (OI) is still visible. The last session could be very volatile and with very high volume, as carryover is bunched up.

The intermediate trend is negative and the Nifty’s 200-day moving average (DMA) has been broken several times, though the market has managed a pullback above that level. Bearishness is also visible in index stocks, which have dropped below their respective 200 DMAs.

The overall OI has actually dropped one session before settlement. The Nifty PCR (Put-Call Ratio) is negative in all time-frames and it’s very bearish for the May series at 0.8. That reinforces chances of a sharp drop on Thursday.

The BankNifty and CNXIT could both also have downsides. The banking index made a downside breakout on Tuesday and a target of 8,750-8,800 could be fulfilled on Thursday. The CNXIT also has a potential downside till around the 5,550-mark.

The Nifty itself has clearly defined resistance above 4,925, and again at 5,000, and upwards in 50-point ranges. On the downside, support at 4,800 could easily be tested. A slide below 4,800 could pull the index down to 4,650. That’s unlikely to happen on Thursday, but net losses in June are very likely — the bull market of 2009-10 may be over.

The option trader should be prepared for moves between 4,800 and 5,050, with a downside bias. Unfortunately, the market has unreal put pricing, which is liable to change sharply, though the current May risk-reward ratios seem very attractive for bears. The June bearspread risk-reward ratios are better, but the premiums themselves are high. At the same time, selling puts close to money (CTM) seems very high-risk.

Suggestions will be to focus on the June series, if you’re bearish. Prices could change dramatically, depending on where the market opens. The closing premiums of Wednesday may not be very indicative.

A long May 4,900c (36) versus short 5,000c (4) costs just 32 and pays a potential maximum of 68. Despite expiry risk, this position is worth looking at. Even a naked 5,000c is tempting. A long June 5,000c (109) versus a short 5,100c (69) costs a more reasonable 40 and offers a maximum potential return of 60, with no expiry risks.

A May bearspread with a long 4,900p (21) and short 4,800p (3) has an absurd risk-return ratio, costing 17 and paying a maximum of 83. This will change drastically if the market opens low. A June long 4,800p (125) and short 4,700p (95) costs 30 and pays a maximum of 70. This is more acceptable and avoids expiry risks. Playing spreads in the June series seems much predictable.