Fair chance of Nifty rising till 10,600

The last two weeks have seen a recovery in index values and the Nifty has pulled back into what looks like a trading zone. The Nifty has pulled back above the 200-Day Moving Average (200-DMA) and it has successively tested higher resistance.

This could still be a deadcat bounce, but there are fair chances that the Nifty will bounce till around the 10,600 mark. The pullback above a key resistance at 10,275 has pulled the index back into what is likely to be a trading zone of 10,300-10,600.

On the upside, the index would first, have to move above 10,450 to establish a pattern of higher highs, which would suggest a new intermediate uptrend. A breakout above 10,600 would be a very positive development though the Nifty would have to break out above 11,170 and set a new high before we can call it a continuation of the bull-market. A drop below 10,200 where the 200-DMA is currently placed, would confirm this as a big bear market. The most recent low was 9,951 (March 23)

The short-term trend has been positive in the settlement with gains of close to two per cent in the past fortnight. The VIX has dipped as the Nifty has risen, which indicates that traders are less fearful. Breadth has gone positive and there's more volume in net winners.

Domestic institutional investors have been net buyers to the tune of ~28 billion in April, while the foreign portfolio investors (FPIs) are just about net positive. Retail sentiment is also positive again. The rupee has gained a little of its lost ground against the dollar.

Importantly, the FPIs have been net buyers of rupee debt in April, after the Reserve Bank of India held status quo and made a dovish projection indicating that inflation will remain under control while GDP growth will accelerate. The signals out of the bond market have improved with the GoI announcing that it would borrow less from the bond market in the first half of 2018-19.

Trend-following signals now suggest holding a buy on the Nifty with a stop at 10,200. In the long-term, the Nifty has 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.

Sentiment was especially badly affected in banking and financials and the bounce has since been biggest in 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 just above 25,000. That's above the 200-DMA, which is at 24,900.

A strangle on the bank with long April 26, 24,000p (93), long April 26, 26,000c (65) may be profitable. This could be hit in three or four big sessions. It is almost zero-delta but the put is much more expensive, despite being further from money. This long strangle can be offset with a short April 19 (30), short April 19 (45) for a net position that costs 83.

The Nifty closed at 10,379 on Tuesday. A bullspread of long April 10,500c (68), short 10,600c (36) costs 32, pays a maximum 68 and it's about 120 points from money. A bearspread of long April 10,200p (87), short 10,100p (61) costs 26, pays a maximum of 74. This is about 180 points from money.

These are both reasonable positions given a long way to settlement. The risk:reward bias is towards the bullspread. A brave trader could also consider selling the options at 10,200p, 10,600c, given that we expect the index to continue moving within this zone. The risk is that newsflow may cause a big upheaval since corporate results will start flowing soon and there is also the political volatility associated with the Karnataka elections .