Nifty 10,075 last reliable support for market, long-term trend yet bullish

The trading pattern remains volatile. But, nervousness may be easing off as the market adjusts to the Punjab National Bank scam. The global trading pattern has been less volatile this week. However, India had its worst settlement in a while with the Nifty losing over 6.2 per cent going into settlement day. 

It's still too early to judge if this is a big trend reversal, or an intermediate correction. The Nifty is down seven per cent from the all-time high of 11,170, recorded in late January. Of the three segments of players - Domestic institutions (DIs), retail investors and Foreign Portfolio Investors (FPIs), only DIs have been net buyers since the Budget. 

Option premiums spiked up through the settlement but the VIX is now dropping. However, this could be a function of the settlement being around the corner and it may just indicate likely short-covering. 

The long-term trend should still be counted as bullish. But the intermediate trend maybe negative. The 200 Day Moving Average (200-DMA) is at around 10,075-10,100, which would be the last reliable support for the bull market. The Index has bounced twice from 9,675, since December 2016. If the 200-DMA breaks, the 9,675-9,700 region would be the next support. 

The market broke down from 11,170. The Nifty next tested support at 10,585-10,600 from where it bounced on February 5. Then it fell to a intra-day low of 10,276 on February 6. The short-term trend is hard to read. The Nifty index has stayed above 10,275, but it has not been able to break out above 10,600. Trend-following signals suggest holding a sell on the Nifty with a stop at 10,700. 

 

Until the Budget, domestic institutions, FPIs and retail investors, had all been strongly bullish in calendar 2018. This resulted in a broad uptrend across most sectors. Corporate earnings in Q3 have been decent enough. But the downtrend has been equally broad since Budget though smaller stocks have got hit harder. 

Traders must remain braced for currency volatility. Worries about higher oil and metals prices also continue. The dollar has surged since the Budget session and so have the yen and euro. The dollar now looks set to break out above 65 so a long dollar/rupee position is tempting. 

The previous uptrend started in September 2017, from support at 9,675-9,700. In the longer-term, the Nifty moved North in December 2016, from 7,900 levels to a high of 10,550, hitting that level twice in December 2017, before correcting down and then moving to the current high of 11,170.  

The Nifty Bank has crashed. The "Bank" is currently at 24950-levels after hitting a high of 27,650 and a post-Budget low of 24825 as the PNB scam broke. A strangle of long March 28, 26,000c (144), long March 29, 24,000p (227) is expensive now. It's also asymmetric since the put premium is much higher than the call despite the position being almost zero-delta.

Either 24,000 or 26,000 could be hit in three to four trending sessions. There should be premium decay if there's no big movement on settlement day. It may be worthwhile to sell the short March 28 strangle today , and buy it back with expected premium decay on Friday, February 23. After Monday February 23, it will be worth holding a long 24,000p, long 26,000c strangle on the March 28 expiry. This could be offset with short Mar 1, 24,000p, short March 1, 26,000c. 

The Nifty closed at 10,397 on Tuesday. Look at positions roughly 200 points from money. A bullspread of long March 10,600c (91), short 10,700c (57) costs 34, pays a maximum 66. A bearspread of long February 10,200p (109), short 10,100p (86) costs 23, pays a maximum of 77. A trader could sell these positions on Settlement, intending to buyback after expected premium decay on February 23.