Breakout above 10,650 on Nifty is a positive

The Nifty has continued its northwards journey, pushing through resistance between 10,650 and 10,700. The index is well above the 200-day moving average (200-DMA) and there is a likely short-term target of 10,900.

While the short-term and intermediate trends are up, the index will have to cross the alltime high of 11,170 to confirm that the big bull market remains alive. If there is a trend reversal from below 10,900 levels, there will be successive supports between 10,600 and 10,700, and then at 10,300-10,400. The 200DMA is now running between 10,250 and 10,300.

A fall below 10,200 would push the index below its own 200-DMA and suggest that this entire upmove was a “dead-cat bounce”. In that case, we would expect a continuation of the bear market over the long-term. The most recent low was 9,951 (March 23) and a fall below that would confirm a big bear market. In the longerterm, the Nifty has bounced twice from 9,675, post December 2016. If the 9,950 support breaks, the 9,675-9,700 region is the next support.

The market could move for an indefinite period between this wide range of 9,950-11,150 without giving a clear indication of the long-term trend. But, the breakout above 10,650 is a positive development. The gains in the April settlement amounted to around 5.7 per cent and gains have already been registered in the May settlement.

Domestic institutional investors have been net buyers to the tune of ~84 billion in April, while the foreign portfolio investors (FPIs) are net-negative in equity to the tune of ~55 billion. Retail sentiment seems positive. The FPIs have sold around ~100 billion of rupee debt in April and negative FPI attitude has been a factor in pushing the rupee down, to ~66.66/dollar. The rupee has lost even more ground versus other hard currencies.

The VIX has dipped as the Nifty has risen, which indicates there is less fear in the market. Breadth is positive in the F&O segment and there is more volume in net winners. Trend-following signals suggest holding a buy on the Nifty with a stop at 10,600.

The bounce in banks has been quite strong, despite scandals and poor results. The Nifty Bank slid from 27,200 on the Budget day to move down below its own 200-DMA for two longish periods. It has risen above the 200-DMA again and is currently held at 25,530.

A strangle with long May 31, 24,500p (105), long May 31, 26,500c (90) may be profitable. This could be hit in four trending sessions. It is almost zero-delta. This long strangle can be offset with a short May 10, 24,500p (15), short May 10, 26,500c (13). The net position costs 167.

May could see a lot of volatility. Apart from corporate results, there's domestic political newsflow, and global newsflow. The US Federal Open Markets Committee meets this week. The Karnataka elections are in mid-May. Crude prices could swing as well.

The Nifty closed at 10,739 on Monday. A bullspread of long May 10,800c (123), short 10,900c (76) costs 47, pays a maximum 53 and it is 61 points from money. A bearspread of long May 10,700p (109), short 10,600p (79) costs 30, pays a maximum of 70. This is 39 points from money. The bearspread risk : reward ratio is favourable, indicating traders expect a continuing uptrend.

Given a long settlement and likely volatility, wider spreads like a bullspread of long 10,900c (76), short 11,000c (41), or a bearspread of long 10,600p (79), short 10,500p (57) are possible. This bullspread costs 35, pays a maximum 65 and is 161 from money. The bearspread costs 22, pays a maximum 78 and is 139 from money. A combination would cost 57, pay 43, and cover a swing of 2.5 per cent in either direction.