Nifty may continue its rebound till 10,650
The Nifty continues to rise, although the momentum of the uptrend has slowed. It has now pulled above the 10,500 mark, which is well above the 200-Day Moving Average (200DMA). This could still be a dead-cat bounce. But, there are fair chances that the Nifty will continue its rebound till around the 10,600-10,650 mark. This is likely to be a trading zone of 10,300-10,600. Breakouts from either side of this range will probably lead to a 300-point move till either 10,000 or 10,900.
The index move above 10,450 establishes a pattern of higher highs, which suggests an 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 3.4 per cent. The VIX has also dipped as the Nifty has risen, which indicates that traders are less fearful. Breadth is positive in the F&O segment and there's more volume in net winners.
Domestic institutional investors have been net buyers to the tune of ~36 billion in April, while the foreign portfolio investors (FPIs) are net negative to the tune of ~10.8 billion. Retail sentiment seems to be positive again. The rupee continues to slide however, and it's down to 65.39 per dollar. This should help information technology (IT) stocks in particular but Infosys has been hit by hammering.
The FPIs have also been buyers of rupee debt in April. The positive the Reserve Bank of India projections in the Policy Review have helped turn sentiment. The signals out of the bond market have improved a bit with the government of India announcing that it would borrow less from the bond market in 2018-19.
Trend-following signals suggest a buy on the Nifty with a stop at 10,350. In the longterm, 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.
The bounce in banks has been strong despite ongoing scandals. 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 25,339. That's above the 200-DMA, which is at 24,900.
A strangle on the bank with long April 26, 24,500p (41), long April 26, 26,000c (64) may be profitable. This could be hit in two big sessions. It is not zerodelta. This long strangle can be offset with a short April 19, 26,000 (5), short April 19, 24,500 (13). The net position costs 88.
Expiry effects are visible in both Bank Nifty and Nifty. The Nifty closed at 10,528 on Monday. A bullspread of long April 10,600c (51), short 10,700c (20) costs 31, pays a maximum 69 and it's about 70 points from money. A bearspread of long April 10,500p (65), short 10,400p (40) costs 25, pays a maximum of 75. This is only about 30 points from money.
These are both reasonable positions, as settlement approaches. The risk:reward bias is favourable towards the bearspread. However, the PutCall Ratio is bullish at 1.44. The put option chain has high volumes down till 10,000 level, with peak volumes at 10,300. Call volumes are high until 11,000, with peak volumes at 10,700. That 10,300-10,700 range corresponds well to the chartist trading zone of 10,300-10,600 mentioned above.
The risk is that newsflow may cause a big upheaval as corporate results start flowing. There is also the political volatility associated with the Karnataka elections. Not to mention Syria and the USChina Trade War.
The short-term trend has been positive in the settlement with gains of close to 3.4%. The VIX has also dipped as the Nifty has risen, which indicates that traders are less fearful