Close below 200 DMA will indicate bear market

Last Updated: Wed, Mar 27, 2013 04:26 hrs

The market has been continuously bearish for seven consecutive sessions. The global markets have been unhappy about Cyprus while domestic politics has also been a bearish factor. The Nifty hit resistance at 5,970 and has since slid to a succession of four-month lows. The current support is at 5,610-5,630.

The Bank Nifty has lost more ground than the overall market and given its large weight in the Nifty and Sensex, it has dragged down the market. The financial index has been bearish in the short-term and it is now showing signs of going into a long-term bearish trend after bulls were disappointed with a cautious credit policy. The BankNifty has dropped below its own 200-Day Moving Average (DMA) and it now has resistance at around 11,300.

The Nifty's trends also seem bearish. The long-term trend is being tested with the index hovering close to its own 200 DMA in the 5,600-zone. Obviously the short-term trend and the intermediate trends are bearish since patterns of lower highs and lower lows have been established. Moving average crossover systems such as the 10 DMA versus the 20 DMA are also giving sell signals.

If the Nifty dips below its own 200 DMA (which is between 5,580-5,630 depending on methods of calculation) and it closes below those levels, it would more or less confirm a long-term bear market. All the breadth signals have been bearish with declines consistently outnumbering advances and volumes dropping. The Junior is also hovering on or just below its 200 DMA. It is very difficult to set targets for this sort of continuous downtrend. A trader who goes short with the trend should probably set a trailing stop loss and move it down with every drop. On the downside, if 5,610 is broken, the near-term target would be about 5,450.

The Nifty's last low was 5,610 and it would have to stay above that to break the pattern of lower bottoms. On the upside, it needs to beat 5,760 to set up a pattern of higher tops. There are supports and congestion points scattered at roughly 25 point intervals across the 5,600-5,750 zone. The put-call ratios are extremely bearish going into the settlement. PCR is not a very reliable signal near a settlement but these ratios suggest the market is in very bad shape. There hasn't been much carryover and Thursday's session could be high-volume for that reason.

The three-month PCR and the March PCR are at 0.8 or lower. Consensus expectations in the next three or so sessions seem to be ranged between 5,525-5,750. April is likely to be yet another month that might see a large move and option traders can afford to take positions at a little distance from the money. The Nifty is at 5,640. Near-the money April calls may be slightly over-priced. A long 5,800c (42) and short 5,900c (19) costs 23 and pays a maximum 77 while a near-the money spread of long 5,700c (80) and short 5,800c costs 61. A long 5,600p (66) and a short 5,500p (39) costs 27 and pays 73 while a long 5,500p and a short 5,400p (22) costs 17 and pays 83. Combining two of these spreads into a long-short strangle position, for example with a long 5,400p, long 5,800c and a short 5,300p (18) and a short 5,900c (19) costs a net 26. This position has wide breakevens at 5,374 and 5,826.

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