Nifty's fall below 5,135 to confirm bear market

The market has gone bearish in the past three or four sessions. But the net movement hasn't been much, and it goes into settlement with support holding above the 200-day moving average (DMA). As of now, the intermediate pattern remains negative.

The key level on the downside is the low of March 28, at Nifty 5,135. This was below the 200 DMA. The market would need to drop below 5,135 to confirm a long-term bear market. The key high is 5,379, the high of April 3. A rise above 5,379 would indicate an end to the bearish intermediate trend.

If the market range trades between 5,135-5,379, the trader should watch for a breakout without over-commitment. Most breadth indicators are negative. Volumes have dropped. Advance-decline ratios are negative. DIIs and FIIs have been net sellers for the past five sessions. The dollar/rupee rate has hit a succession of new three-month highs and a long dollar-rupee is still tempting.

In this short-term, support between 5,175-5,225 has been tested without breaking. This is a critical zone above the 200 DMA. The daily high-low volatility has been on the low side as well. Any breakout outside 5,135/ 5,380 will have higher volumes and probably lead to a move of 200-250 points, with targets of 4,900 or 5,600.

Among subsidiary sectors, CNXIT has gone bearish. Wipro and Infy offered bearish guidance and S&P has downgraded. CNXIT could drop till 5,200 if the bearish trend continues. On the other hand, a weak rupee may provide some support.

The Bank Nifty is high-beta with respect to the Nifty. It is also showing a negative trend. If it slides below 9,950, it could fall till around 9,700. The Bank Nifty could also lead a possible recovery if it bounces till 10,600. Among other sectors, PSUs in general, look under pressure.

The Nifty put call ratio has got worse. Overall, it's about 1.1 but the April ratio is 1.04 and that could mean pressure going into settlement. Option chain analysis isn't too useful due to settlement considerations. But it suggests that traders are expecting moves of anywhere between 4,800-5,600 in the next 5-10 sessions. It makes sense to bet on higher volatility in May. This sort of tight-ranged trading cannot continue much longer. However, it has done traders a favour since May premiums and spreads are quite cheap reasonably close to the money.

For settlement day itself, the on-the-money April 5,200c (26) and April 5,200p (28) are together available at a combined value of 54. A long straddle may be an arbitrage, since there would be a profit if the Index swung beyond 5,146 or 5,254.

Using May options, move one step away from money. A bullspread of long May 5,300c (89) and short 5,400c (51) costs 38 and pays a maximum 62. A bearspread of long May 5,100p (71) and short 5,000c (46) costs 25 and pays a maximum 75. Both spreads offer good risk-reward ratios. A trader can also combine the above to create a long-short strangle position. But if you have a 10-session perspective, it's better to take a long 5,400c, long 5,000p, short 4,900p (29) and short 5,500c (27) for a net cost of 41. This pays a maximum of 59, with breakevens at 5,441 and 4,959.

 

The author is an equity and technical analyst