Rise above 5,970 on Nifty will signal trend reversal

The Budget promises to be a volatile session. It is also the February settlement and the US has its sequestration deadline coming up. Europe is nervous due to Italian elections. The Indian market has a bearish feel, with the Nifty losing five per cent in February and mid-caps and small-caps suffering greater losses. Foreign Institutional Investor (FIIs) may be only token participants ahead of the US resolution – they have cut back exposures in the past week. Domestic Institutional Investors (DIIs) have remained net-negative.

Technically, the intermediate and short-term trends are down. The Nifty and Sensex hit their respective three-month lows on Tuesday and there was only partial recovery on Wednesday. The current Nifty support would be 5,740-5,750, which held in the past two sessions. The current resistance would be between 5,825-5,845.

A fall below 5,750 could trigger a slide till 5,625-5,650. On the upside, a breakout past 5,845 could take the index to 5,900-plus. Given the scenario, there could be swings anywhere between 5,700-5,900 on Thursday. The reaction started from a 52-week high of 6,111 on January 29. The recent low is 5,748. On the upside, above 5,845, there is resistance at 25-point intervals. The index must stay above 5,748 to break the pattern of lower lows. It would need to climb above 5,970 to create higher highs, signalling intermediate trend reversal. Moving average (MA) systems like 10-DMA and 20-DMA crossovers are signalling sell. The 200-DMA is at 5,530-5,550. A fall to those levels could mean a long-term trend reversal.

The Budget is difficult to analyse technically because it delivers a huge quanta of price-information within a single session. What we’re seeing is bearish expectations. Usually, the Budget decisively establishes a new trend, or strengthens the extant trend. Statistically, March is usually a losing month. However, very low expectations at the moment have to be taken into account. FIIs may also re-enter with renewed vigour if the US sorts out its issues.

The Bank Nifty is trending down, after breaking below 12,000. It could fall till 11,650-11,700 in the Budget session or bounce back above 12,100. The CNXIT has proved a counter-cyclical hedge and IT majors could be a haven in case of a disappointing Budget.

The USD-INR rate has seen some rupee strengthening ahead of sequestration. This is temporary. But if the FIIs buy in bulk again, dollar inflows will keep the rupee afloat. The EUR-INR and JPY-INR are both likely to see gains for the rupee.

Apart from the chart and MA signals, the poor advance-decline ratios and low volumes are all bearish indicators. The put-call ratios (PCR) are also bearish though this is a weak signal immediately before expiry. The three-month PCR is at 0.83, which is a very bearish reading.

The index is at 5,800. On the Budget session itself, the February 5,900c (9) or the Feb 5,700p (9) could be struck. A trader should however, move to March option positions. A long March 5,900c (66) and short 6,000c (36) costs 30 and it could pay 70. Similarly a close-to-money long 5,700p (53) and short 5,600p (30) costs 23 and pays a maximum 77.

A combination of the above March options - long 5,900c, and long 5,700p offset by short 5,600p and short 6,000c costs roughly 54 and breakevens at 5,646 and 5,954. At least one end of this will be struck in March and both ends may be struck. The trader could also move further away by taking a long 6,000c (36) and short 6,100c (18), or a long 5,600p (36) and short 5,500p (16).