Long-term trend continues to be positive

The day before the settlement, the Nifty saw a sharp retraction. The trigger was weakness in Europe but it was accelerated by profit-booking. The index remains comfortably above its own 200 Day Moving Average (DMA), but the drop makes it likely settlement day will be volatile. Institutional support was consistently good until the sell-off on Wednesday, when FIIs cut exposure. The dollar-rupee exchange rate remains below 50.

In the short-term, the market’s trend could be down. It’s difficult to call the intermediate trend – successive higher tops above the 5,600-mark suggests this is still up. The long-term trend would have to be classified as tentatively up. On the downside, the first key support level to watch is 5,400-5,450. If that is broken, the intermediate and short-term trend would be reckoned down and we’d have to observe support at the 200 DMA level of about 5,300-plus. Range trading within 5,450-5,650 would not clarify much.

The daily high-low volatility has been on the low side until yesterday. But the pre-Budget period is traditionally quite volatile and an added impetus for volatility could be election results. The market may suddenly widen its daily high-low range over the next three weeks (Budget is on March 16). Carryover will be high. Among subsidiary sectors, the CNXIT is holding above support at 6,500, with the next support at 6,300. The Bank Nifty has moved above 11,000 but it was hard-hit and may slide to 10,700 if the selling continues. The financial index would lead the overall market in the direction and probably exceed the Nifty in the magnitude of movement.

Telecom and mining stocks may also be sensitive. The Nifty put-call ratio (PCR) is in an overbought zone. The overall PCR is above 1.7. This could be read as a signal of impending correction or it could be settlement-related. Option chain examination shows March call open interest (OI) is concentrated between 5,500c (200), 5,600c (148), 5,700c (102) and 5,800c (67). The March Put OI has a peak at 5,200p (55), with ample OI also at 5,300p (75) and 5,400p (104) and 5,500p (140). One would guess that some bears are looking at a fall till 5,200, while most traders are focussed on 5,400-5,800. Given March is a long settlement with guaranteed news-flow, this could be an underestimate in either or both directions. Strictly catering for tomorrow, a long strangle of long 5,400p (4) and long 5,600c (5) could pay off big if the market has a large swing. Otherwise, look at March spreads with a perspective of five sessions and move a little further from money.

A bull-spread of long March 5,600c (148) and short 5,700c (102) costs 46 and pays a maximum 54. One step further away, a long 5,700c and short 5,800c (67) costs 35 and pays maximum 65. A bear-spread of long March 5,500p (140) and short 5,400p (104) costs 36 and pays 64. The asymmetry is due to skewed expectations as also reflected by the high PCR. Looking at March strangles, even a long 5,700c (102), long 5,300p (75) offset with a short 5,200p (55), short 5,800c (67) costs a net 55. This has an adverse risk-reward ratio even though either end is 200 points from money. Wait till the settlement turns before trying combination spreads.