No sign of reversal in downtrend

The Budget led to a strengthening of the downtrend. The Nifty hit a low of 5,670 in the Budget session, and it has dipped lower since. Support is holding at 5,660 but the trend doesn't show signs of reversal.

Global financial markets have a bearish feel and while foreign institutional investors (FIIs) have remained net buyers, they have cut exposure in the past five sessions. Domestic institutional investors (DIIs) remain net sellers. The intermediate downtrend started in late January from the 2012 high of 6,111. Since then, the major market index has slid to levels last seen in October 2012 and mid- and small-caps have suffered greater erosion.

Technically, the intermediate and short-term trends are down. The Nifty and Sensex hit their respective 2013 (and three-month) lows on Monday, March 4. The current support is 5,650-5,675. If that breaks, a fall till 5,450-5,500 is possible. On the upside, resistance starts at 5,725.

The index would need to climb above 5,850 to create higher highs, signalling intermediate trend reversal. Moving average (MA) systems like 10-DMA and 20-DMA crossovers are all signalling sell. The 200-DMA is at 5,520-5,550 and a fall below those levels would signal a possible end to the long-term bull market.

The Budget obviously did not enthuse the market. A difficult global situation caused more selling pressure. There could be a pullback if global selling eases off and if the Reserve Bank of India delivers a big rate cut on March 19. Unfortunately, FII liquidity is likely to be low, which means an absence of buying demand.

Statistically, March is usually a losing month and this looks like going with the odds. Among key sector indices, the Bank Nifty is trending down. It fell below 11,500 on Budget and it faces strong resistance above 11,600. The high-beta behaviour of the financial index could mean that it will lose more ground than the Nifty.

The CNXIT has proved to be a counter-cyclical hedge with the rupee losing ground. IT majors are likely to remain a haven. The USD-INR rate has seen the greenback shooting above 55 and it looks as though it may rise further, if FIIs stay away. The EUR-INR and JPY-INR are however, both likely to see gains for the rupee and above 55.45, the USD would be a tempting short.

Apart from chart and MA signals, poor advance-decline ratios and low volumes are bearish indicators. The put-call ratios are also bearish. The three-month PCR is at 0.98, while the March PCR is at 1.01.

The index is at 5,700. A straddle of long 5,700c (81) and long 5,700p (67) costs 148 and the breakevens of roughly 5,550 and 5,850 would be the limit of trader expectations in the next five sessions.

On-the-money spreads have reasonable risk:reward ratios. A long 5,700c (81) and short 5,800c (39) costs 42 and pays a maximum 58. A long 5,700p (67) and short 5,600p (34) costs 33 and pays a maximum 67.

The trader could move one step away from money given that it's early in the settlement. A long 5,600p (34) and short 5,500p (15) costs 19 and pays a maximum 81while a long 5,800c (39) and short 5,900c (16) costs 23 and pays a maximum 77. A combination of the above bullspread and bearspread would create a long strangle versus short strangle position. This has a maximum cost of 42, maximum one-way return of 58 and breakevens at 5,559 and 5,842.