Move below the 200-day moving average indicates a long-term bear market

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The settlement has been negative after an index breakdown from a trading zone. The Nifty dropped below the psychological mark of 10,000, busting its own 200-Day Moving Average (200-DMA) in the process. It is now going through a recovery that has just about pulled it back above the 200-DMA. This could be a dead-cat bounce on short-covering since the signals suggest a long-term bear market is now on the cards.

The Nifty was trading in a zone of 10,300-10,600. Once a key support at 10,275 broke, the likely target was expected to be about 10,000. In fact, the Nifty found support at 9,951 (March 23) before it bounced. It is now at around 10,184, with the Simple 200-DMA at around 10,175. A move below the 200-DMA generally indicates a long-term bear market. 

The index would have to move above 10,450 to establish a pattern of higher highs, which would suggest a new intermediate uptrend. If it drops again, without clearing 10,450, it would need to find support above 9,950, to stave off the threat of a big bear market.

The short-term trend has been positive in the past two sessions with a bounce from 9,950. The zone at 10,275-10,300 is likely to provide stiff resistance. The VIX has stayed fairly high, which indicates that fear exists. Breadth has been negative and there’s more volume in net losers. 

Domestic institutional investors and foreign portfolio investors (FPIs) have been net buyers in March to the tune of Rs 140 billion. The retail selling must therefore, have been heavy enough to knock the index down. 

The rupee has lost ground against three major hard currencies (yen, dollar, and euro). The threatened trade war between US and China and the US Federal Reserve raising the Fed Funds policy rate were both negative factors. Incidentally, FPIs have been heavy sellers of rupee debt in March. The Reserve Bank of India is expected to maintain status quo in its April 5 meeting.

Trend-following signals suggest holding a sell on the Nifty with a stop at 10,300. In the long-term, the Nifty bounced twice from 9,675, post-December 2016. If the 9,950 support breaks, the 9,675-9,700 region would be the next reliable support. The signals out of the bond market have improved a little with the government of India announcing that it would borrow less from the bond market in the first half of 2018-19.

Sentiment has been especially badly affected in banking and financials and the bounce has been biggest in PSU banks. The Nifty Bank slid from 27,200 on the Budget day to move down till 23,600 before it recovered to current levels of 24,435. That's well below the 200-DMA, which is at 24,800. The banking sector is already in an extended bear market. 

A strangle with long April 26, 23,000p (105), long April 26, 26,000c (41) may be profitable. This could be hit in four big sessions. It is almost zero-delta but the put is much more expensive and more likely to be hit. Think of the long call as a hedge against a potential bounce.

The Nifty closed at 10,184 on Tuesday. A strangle of long April 10m400c (79), long April 10m000p (94) costs 173. One side or another would be hit within April. A bullspread of long April 10,400c (79), short 10,500c (49) costs 30, pays a maximum 70 and it's about 215 points from money. A bearspread of long April 10,000p (94), short 9,900p (72) costs 22, pays a maximum of 78. This is about 185 points from money. 

While these are both reasonable positions, the risk: reward bias is towards the bearspread. A brave trader could also consider selling the options closer to money and buying back on Monday after the long weekend. The risk is that news flow may cause a big upheaval during the holidays.