Short term choppy on Japan catastrophe

The short-term trend is choppy after the Japan tsunami. The long-term trend remains bearish. The intermediate trend is indeterminate. There’s resistance between Nifty 5,525 and 5,550 and very strong resistance at the 200 Day-Moving Average zone of 5,600-5,650. In March, the intra-day high has been restricted to 5,575.

Volumes look normal. The institutional attitude is now looking more positive, though still muted. FIIs have bought a net Rs 1,582 crore in nine post-Budget sessions, while DIIs have bought Rs 208 crore.

Technically we would assume resistance at 5,600 holds and on the downside, supports may be tested all the way down to 5,175-5,225 levels. In the long term, we would expect 5,175 to break, given the bearish trend. There is a fair chance of oscillation between 5,350 and 5,600. Volatility will continue, given Japan and Arabia — expect 150-point Nifty sessions.

Breakouts on the upside would look positive naturally, if they went past 5,600-5,675 (the 200 DMAs are spread across that range with the exponential MA below the simple MA). But, even so, resistance at 5,800-5,900 is unlikely to be broken. On the downside, breaks below 5,175 would mean sentiment is deteriorating further.

The open interest position in Nifty options is bullish. The March Put-Call ratio is 1.4, while the overall ratio is 1.3. The carryover is average with two weeks to go. The high PCR could mean a short-covering snap-back till 5,600 or a temporary breakout beyond till 5800+.

The March call chain shows OI focused between 5,500 and 5,900. The March put chain has massive OI bulge at 5,400p strong OI till 5,000. The limit of trader expectation is 5,000-5,900, with consensus not expecting a fall below 5,100.

Both subsidiary indices, the CNXIT and BankNifty look in fair shape. The BankNifty is range-trading 10,700-11,000 while the CNXIT is range-trading 6,600-6,900. The CNXIT could rise if the rupee drops while the BankNifty is remains a high-beta substitute for the Nifty. If RBI does raise policy rates more than expected, it could have a downside till 10,000. The CNXIT has support at 6,400.

The trader must consider three possibilities. One is range-trading between 5,350 and 5,650. the two are big breakout, till either 5,100, or 5900. In all cases, intra-day volatility is likely to be high.

A standard close-to-money bullspread with long March 5,600c (78) and short 5,700c (38) costs 40 and pays a maximum 60, while a CTM bearspread with long March 5,500p (82) and short 5,400p (55) costs 27 and pays a maximum of 73.

The bearspread has a much better risk-reward ratio and hence, seems more attractive. It is also closer to money – a sign that short-term traders have a positive bias in expectations. Given a bullish bias, a wider bullspread like long 5,700c (38) and a short 5,800c (16). This bullspread will cost 22 and pay a maximum 78. It would gain on a further bounce, even if it is not struck.

A long strangle of long 5,700c (38) and long 5,400p (55) is approximately zero-delta. It can be offset with a short 5,300p (36) and a short 5,800c (16) to create a long-short strangle. This costs a net 41 and pays a maximum 59 with breakevens at 5,741, 5,359. It is not high risk due to expectation of high volatility. There’s a good chance of settling off with profits in both directions as indeed occurred with last week’s suggestion of a similar long-short zero-delta strangle position.