Support at 5,875 on Nifty looks strong, may hold

The market stayed in a downtrend through last week and didn't show definite recovery on Monday. Support between Nifty 5,875-5,900 is being tested. There is short-term resistance at 5,925-5,945.

The short-term trend may still be down. The intermediate trend has been down for two weeks. The long-term trend should still be up.

The reaction started from a high of 6,111 on January 29. A pattern of lower highs and lower lows has been established to confirm an intermediate downtrend. The recent low is 5,979 on February 11.

On the upside, above 5,945, there is resistance at 25-point intervals. The index would have to cross 6,111 to establish higher highs and confirm the long-term trend is still up. The support at 5,875 looks strong and it may hold. A dip below 5,875 could drag the Nifty down till 5,820 or even 5,750.

Intermediate trends can ease off within 2-3 weeks or continue for months. It depends on whether the intermediate trend is a reaction against the prevailing long-term trend as in this case, or in phase with it. Given that this is a correction, it could ease off in the next 10 sessions. But the 20 Day Moving Average (20 DMA) and the 10 DMA are both giving sell signals and the 10
DMA is below the 20 DMA, which is a bearish signal as well.

The Bank Nifty broke support at 12,500. Its most recent low was 12,273, which is a 700-point downmove from its January 29th high of 12,960. This is over 5%, versus the Nifty's 3.8% correction. The financial index could drop till 12,100 if the support of 12,275-12,325 breaks.

The financial index has a high-beta relationship with the Nifty so the over-reaction is expected. But weakness in financials could drive a continuing downtrend.

So far, FIIs have remained net buyers. In fact, they've bought heavily through February. If FIIs turn net sellers, there will be an impact on the USDINR rate as well as the stockmarket. The USD has strengthened against INR in the last three sessions, on the back of domestic demand for crude imports. A lonbg USDINR position still seems attractive.

The key to a turnaround may be pre-Budget speculation, which is often bullish. That will be the major influence in the last 10 days of this settlement. Technically, most signals suggest traders should be neutral or bearish. The MA-based systems are in sell mode, and a new 2013 low was established on Monday. But the Nifty put-call ratio has improved slightly. The February PCR is 1.05, which is neutral, and the 3-month PCR is 1.07.

The index is at 5,900. A straddle of long 5,900c (83) and long 5,900p (63) costs roughly 145 and the breakevens at 5,755, 6,045, would be the limit of trading expectations in the next 5 sessions. The February call chain has high open interest at the 6,000c (39), 6,100c (15) and 6,200c (5). The put chain has high OI distributed 5,600p (5), 5,700p (13), 5,800p (30) and 5,900p (63).

The on-the-money bearspread of long Feb 5,900p (63) and short 5,800p (30) costs 33 and pays a maximum 67. A bullspread of long 6,000c (39) and short 6100c (15) costs 24 with a maximum payoff of 76. If we combine a long 5,800p, L 6,000c, and a short 5,700p and S 6,000c, the resulting position costs 41 and offers breakevens at 5,758, 6,042.