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Markets are in an intermediate downtrend

Devangshu Datta 

The market trend remained indeterminate and uncertain, going into the settlement. This week has seen an ongoing correction. The US Federal Reserve has failed to reassure global about the possibility of raising rates. The European Central Bank's quantitative expansion plan continues to cause turmoil in bond and currency

Technically, the financial sector has seen a sell off and there has also been volatility on account of the coal auction outcomes and the telecom spectrum auctions. The next major trigger could arise around the Reserve Bank of India's policy review on April 7. After that, the Q4 results cycle will be a driver.

Foreign institutional investor attitude has been good and the FIIs have been buyers through the past few sessions. But the trend has been net negative, on account of domestic selling. Apart from everything else, the usual end-of-fiscal advance tax payments would have caused a cash crunch.

The Nifty has broken a sequence of successive supports. It is currently testing support at 8,500-8,550. This zone has been extensively traded and there is support/ resistance at every 50-point distance. So, if 8,500 breaks, 8,450 may hold. Similarly, there will be resistance at 8.600, 8.650, etc.

There have been net losses since the Budget after the market hit a high of 9.119. Expiry considerations are also in play. The BankNifty has dropped more sharply and it is now below 18,500. Traders are not expecting any more rate cuts from RBI, given slightly higher CPI numbers for February. But if there are such hopes arising around April 7, there could be a turnaround in financials. A bearspread on the BankNifty looks like a reasonably risk-free way to play a possible disappointment if RBI doesn't cut rates. A long 18,000p (223) and short 17,500p (109) costs 114 and pays a maximum of 386.

The Nifty peak was matched by new highs from the Midcaps and Smallcaps. So, the big long-term trend should still be bullish by definition. However, the BankNifty failed to make new highs and the BankNifty has a weight of 24-25 per cent in the Nifty itself. Implied volatility remains high. The rupee has recovered on FII buying after being pushed down close to 63. A fall below 63 towards the month-end could occur if oil public sector undertakings make their usual crude purchases or if the FIIs sell. The Euro has retreated against most currencies including the rupee. So, traders might look at long USDINR, short EURINR pairs.

The implication is that we are now in an intermediate downtrend. The 200-Day Moving Average is in the zone 8,050-8,100 and the last intermediate correction saw support come in at 7,950-8,000. A move below that 8,000 level would indicate a potentially big bear market. The Nifty put-call ratios are bearish. Both the 3-month and one-month PCRs are below 0.9 but at month-end this is not a good indicator. The April Call chain has open interest peaking at 9,000c, with bulges across 8,600c-9,000c. The April Put OI is ample between 8,000p and 8,500p. The Nifty could move 100-plus points in any given session.

The index was held at 8,530. The April Call chain is 8,600c (137), 8,700c (91), 8,800c (57), 8,900c (34) 9,000c (20). The Put chain is 8,500p (85), 8,400p (56), 8,300p (36), etc. Obviously the calls near money are overpriced in comparison to the puts.

The bullspread of long April 8,700c, short 8,800c, costs 34, with a maximum payoff of 65. A CTM bearspread of long 8,400p, short 8,300p costs 20 and pays 80. The bearspread is in fact, closer to money! Traders should wait for premiums to settle down before considering strangles.

First Published: Wed, March 25 2015. 22:42 IST