Short-term moving average systems are all signalling 'sell'

The market has been in a short-term downtrend. A few more sessions of correction could lead to a possible long-term bear market. However, one would prefer to wait for trend confirmation, due to the high volatility over the past few weeks.

The Nifty has seen five sessions with net movements of over 2 per cent in the past three weeks. But they have mostly cancelled by going in different directions for a net loss of 1 per cent in the past month. In terms of chart formations, the index has swung between 5,900-6,225.

The weak GDP data on Friday may have pushed it over the edge. But there's support below the current readings, at 5,850-5,900, and lower down at 25-point intervals. If the Nifty closes below 5,850, it will probably test support down to 5,775. Given a recent 52-week high of 6,225, and the recent high levels of volatility, retracements down to 5,775 levels would have to be written off as normal. On the upside, a bounceback till anywhere below 6,225 would also not count as exceptional.

If the index beats 6,225, it would confirm the long term bull market is alive by registering a 52-week high. A dip below 5,775 would breach the 200 DMA and suggest a reversal in the long-term trend. One could expect 5,477 a crucial support point since that is where the last deep correction of 2013 ended.

Moving average (MA) systems are likely to lag this sort of sharp, choppy movement. The short-term MA crossover systems are all signalling "sell" and the index is below its 7 DMA, 10 DMA and 20 DMA. This suggests downtrend will continue.

The high-beta Bank Nifty remains key to overall movement. The financial index has broken down below 12,500 and could have a downside till either 12175-12200, or till 12000-12050. On the upside, it has heavy resistance at 12650. It has to beat its 52-week high of 13414 to confirm a continuing bull market for financials. Traders' hopes for the financial sector are focused on the RBI review on June 17. Apart from the RBI's actions, traders must contend with possible political volatility and events abroad, especially in the US.

June could be an extremely volatile settlement. The put-call ratios for the Nifty are close to neutral at 1.03. June premiums are ranging higher and the USD is uptrending. If it breaches 57 and closes above, the USD could surge quite a distance.

Options traders should be braced for swings anywhere between Nifty 5600-6200 in the next 5-10 sessions. There's excellent open interest till the 6300c on the upside, with the maximum OI held at the 6200c. On the downside, there's a lot of OI till 5600p, with the maximum at 5900p. Risk:reward ratios are acceptable near the money. A bullspread of long June 6000c (80) and short 6100c (43) costs 37 and pays a maximum 63. A bearspread of long 5900p (77) and short 5800p (46) costs 31 and pays a maximum 69. A trader looking to a two-way position can move a step away from money. This means taking a long 6100c, long 5800p offset with a short 6200c (21) and a short 5700p (27). This combination costs 42 and pays a maximum of 58 with breakevens at 5758 and 6142. The ratio is favourable and if the market maintains its current volatility profile, either end could be hit.