Short-term moving average systems are signalling sell

The Nifty has dropped below its own 200 Day Moving Average (DMA), signalling high probability of a new long bear market. There has been no recovery, although there seems to be support at 5,535. Since the other market indices and breadth signals are negative, there is a very good chance that prices will trend quite a lot lower in the long term.

The global markets are tense, while domestic political instability is adding to the pressure. Market breadth is poor, both in terms of adverse advances to declines ratios and lower volumes. The Nifty has registered a pattern of lower lows and lower highs since March 11 when it topped at 5,970. The latest low was 5,534 on Friday and 5,537 on Monday. In a broader sense, the trend has been down since January 28, when a 52-week high of 6,111 was registered.

If one assumes March 11 as the initial point, the downtrend has lasted four weeks. Intermediate downtrends can last a lot longer; 12-14 weeks is possible. The targets for chart-watchers are simple. The Nifty must stay above 5,535 to register higher lows and it should rally above 5,750 to register higher highs.

In the immediate future of the next five sessions, a fall below 5,525 could mean a slide till 5,425-5,450. There is a lot of resistance at 5,640-5,650 which is where the 200 DMA is also situated. So, a short-term relief rally is unlikely to cross that mark. Short-term moving average systems are signalling sell. The 10 DMA versus 20 DMA crossover system is signalling sell and so is a 7 DMA versus 10 DMA crossover system.

The Bank Nifty is also below its own 200 DMA and so is the Junior. The Bank Nifty could dip below the 11,000 mark soon and a downside target of 10,650-10,700 seems on the cards. The IT index is also under pressure. Good results from Infy or TCS might rescue IT but expectations seem negative.

The three-month put-call ratio (PCR) for the Nifty options segment is hovering at 1.1 and the April PCR is at 1.05. This is just a little on the positive side with a PCR of one considered neutral. There are supports and congestion points scattered at 25-point intervals across the 5,600-5,850 zone. In the context of the two remaining weeks of the April settlement, a big trending move still looks possible. Option traders are getting reasonable risk:return ratios near the money, however. The Nifty is at 5,540 with the futures premium ranging at 15-20.

A straddle of long 5,600c (56) and long 5,500p (52) suggests the market is mildly optimistic in the very short-term due to the lower put premium. This straddle would break even at roughly 5,710 or 5,390 and those are the limits of expectation in the next five sessions.

A long 5,600c (56) and short 5,700c (25) costs 31 and pays a maximum 69. A long 5,500p (52) and a short 5,400p (26) costs 26 and pays a maximum of 74. Both are decent ratios. One of these, if not both these spreads, is extremely likely to be struck. If these are combined into a long-short strangle position, with a long 5,500p, long 5,600c and a short 5,400p and a short 5,700c, it costs a net 58 and pays a one-way maximum of 42. This has breakevens at 5,442 and 5,658.