Short-term trend negative, long-term bearish

The short-term trend turned negative on Monday. The Budget wasn’t enough to trigger sentiment reversal. The long-term trend remains bearish. The intermediate trend is also looking indeterminate or negative. There is resistance above Nifty 5,525 and very strong resistance at the 200 Day-Moving Average zone of 5,600-5,625. The post-Budget move couldn’t break out above 5,575.

Volumes are normal. Institutions are still out of the market with very small commitments. Retail players are spooked by the oil spike. After the selloff on March 7, we see resistance at 5,600 and on the downside, supports may be tested all the way down to 5,175-5,225. In the long term, we would expect 5,175 to break, given a long-term negative trend.

There is a chance of oscillation between 5,350 and 5,600 for a few sessions. The Budget-related volatility is likely to continue due to the fears of continuing trouble in West Asia and its impact on crude oil prices. So, expect 150-point Nifty sessions.

This is a long settlement. The open interest position in Nifty options is very interesting. The March PC ratio is 1.7, which is theoretically bullish, but unusually high. It could mean a sudden short-covering snap-back till the 5,600 level or a temporary breakout beyond till 5800+. The overall PCR is at 1.2, which is also in the bullish zone. So, the sentiment is not absolutely negative.

The March call chain shows OI focused between 5,500 and 5,900. The March put chain has massive OI bulges at 5,300p and 5,400p. Volume drops below that, although there is liquidity till the 5,000p. So, the limit of trader expectation is 5,000-5,900, with consensus not expecting a fall below 5,200.

Both the subsidiary indices — the CNXIT and BankNifty — went weak on Monday. The BankNifty remains a high-beta substitute for the Nifty futures. It could have a downside all the way till 10,000 or even lower if this downmove tests the Nifty 5,175 support levels. The CNXIT may bounce earlier if the rupee weakens a lot, as looks likely. But it could test 6,400.

A trader must consider several possibilities. One is range-trading between 5,350 and 5,650. Another is the big breakout in either direction. On the downside, this could go till 5,000 and it could test 5,900 on the upside. In all cases, intra-day volatility may be high.

A standard close-to-money bullspread with long March 5,500c (119) and short 5,600c (73) costs 46 and pays a maximum of 54, while a CTM bearspread with long March 5,400p (105) and short 5,300p (75) costs 30 and pays a maximum of 70.

The bearspread has a much better risk-reward ratio and, hence, seems more attractive. If you have got a bullish bias, go wider with a long 5,600c (73) and a 5,700c (40). This bullspread will cost 33 and pay a maximum of 67. It would gain on a bounce even if it is not struck.

A long strangle of long 5,700c (40) and long 5,200p (53) is zero-delta. It can be offset with a short 5,100p (37) and a short 5,800c (19) to create a long-short strangle. This costs a net 37 and pays a maximum of 63 with breakevens at 5,162 and 5,737. It is not very high risk, though the strikes are quite far from money, due to the expectation of high volatility. There is a good chance of settling off with profits in both directions.