Nifty back near 200 DMA

The downtrend became steeper with another big sell off on Monday. The immediate trigger was fear of rising oil prices. The short-term trend is obviously down and ditto the intermediate trend. The long-term trend may be tested in the next few sessions. The index is back near its 200 Day Moving Average (DMA), which is placed somewhere between 5,150 and 5,250, depending on mode of calculation. If it drops below the 200 DMA, we'll have to write off the past seven weeks, as a bull-trap that occurred in the middle of a big bear market.

The FII have remained net positive but the domestic selling has been heavy. On Monday, there was some FII selling. Coupled to demand from oil-importers, this could push the dollar-rupee rate below 51 - that's a tempting trade.

The next key support level is 5,175-5,225. If that is broken, the market would drop below its own 200DMA. Rebounds could occur till 5,450-5,500 level before hitting heavy resistance. Given the weak short-term and intermediate trends, we expect lower tops and lower bottoms.

The daily high-low volatility has jumped and so have option premiums in the March settlement. Given the news triggers such as the Budget and the elections, the volatility is likely to continue. Among subsidiary sectors, the CNXIT is holding above support at 6,500, with the next support at 6,300. If the dollar rises, the sector will offer a defensive hedge.

The Bank Nifty has lost nearly 10 per cent. The financial index is high-beta with respect to the Nifty. It could drop till the 9,700-mark in the next five sessions if the bearishness continues. Telecom and mining stocks will also remain sensitive.

The Nifty put call ratio has corrected from a highly overbought zone. The overall PCR is still at 1.4. This is closer to normal healthy levels and it could signal a pullback soon. Option chain examination shows March call open interest (OI) is very high at 5,500c (87), 5,600c (56), with ample liquidity below at 5,400c (129) and also higher at 5,700c (34). The March Put OI peaks at 5,200p (102) and 5,300p (143), with ample OI also at 5,100p (76) and 5,000p (53).

Traders focussed on the next 5-10 sessions should be looking at the range of 5,000-5,600. The settlement is long enough to see even larger swings. Premiums close to money are high. A CTM bearspread of long 5,200p and short 5,100p costs 36 and pays a maximum 64. This is a reasonable risk:reward ratio (RR). A CTM bullspread of long 5,300c (180) and short 5,400c (129) has an adverse RR with a cost of 51 and maximum return of 49.

One step further away, a long 5,400c and short 5,500c costs 42 and pays a maximum 58, which is acceptable. A long 5,500c and short 5,600c costs 31 and pays a maximum 69. If you are optimistic and have a ten-session perspective, this bullspread is tempting.

Looking at March strangles, the RR is adverse even with a long 5,500c (87), long 5,200p (106) offset with a short 5,100p (76), short 5,600c (56). This costs a net 61 and pays a maximum 39. It's tempting to suggest the reverse set (short 5,500c, short 5,200p and long 5,100p, long 5,600c). But that will require very good trading skills to handle if the market stays volatile.