Derivatives strategies: Short-term trend likely to be negative

The Nifty made a failed breakout to above 11,000 and then reacted down quite sharply. It’s back in the trading range of 10,700-11,000 even though the RBI made a surprise rate cut and changed policy stance to “neutral” from “calibrated tightening”. The index is again taking support from its own 200-Day Moving Average (DMA). Until and unless, there’s another breakout or breakdown, judging intermediate trend will be impossible. The short term trend seems negative. Volumes continue to be low.
 
FPIs have been strong net buyers in February and domestic institutions have small net sellers. Breadth remains negative with over 1,500 results of Q3 results in. Session volatility has eased off and the Vix is trending low, indicating potential bullishness. The rupee lost some ground after the Budget but it has recovered to show little net change in February.
 
Crude prices remain stable. Political and geopolitical concerns remain. The

continues.  The US Federal Government could be shut down again if there’s no compromise on building the wall by this weekend. Brexit continues to lookchaotic. The Rafale row intensifies.
 
The Nifty hit its all-time high of 11,760 in late August and it retracted to a low of 10,005. An eight -week downtrend led to 14.9 per cent retraction off the peak, before a rebound started in early December. The index range traded between 10,,500-11000 before making a breakout above 11000. The breakout failed. 
 
For sustainable bullishness, the index must beat 11,000 and stay above.  On the reaction it has taken support from the 200 DMA which is at around 10,850.  If there’s a decisive move, say of 2 per cent in either direction off the 200DMA, till either 10,600, or 11,050, and that move is sustained for two sessions, the trend could be traded with more confidence.
 
The Bank Nifty also did not respond with an uptrend to the rate cut and futures is at 27,250. A long Feb 28, 28,000c (75) and a long 26,500p (93) can be offset with a short Feb 21, 28,000c (30), short 26,500p (40).  Net cost is 98. To cross breakeven would need three big sessions. If either of the shorts are hit, losses will be compensated for by premium gains in the long spreads.  The potential upside is unlimited.
The Nifty is at 10,888. The new weekly options give us more flexibility though liquidity is spotty as yet. A short Feb21 11,100c (28), short 10,700p (30) position can be taken, along with a long 11,100c (53), long 10,700p (54). These calendar spreads have a net cost of 49. Again, either short option being hit would mean compensating premium gains in the long spread. The potential upside is again, unlimited.