Most signals positive, but VIX indicates nervousness

The Nifty looks set to push North, but it could run into heavy resistance above 10,750-10,800. The index is well above the 200-day moving average (200-DMA), which is now between 10,250 and 10,300. There is a possible short-term target of 10,900.

The index will have to cross the all-time high of 11,170 to confirm the big bull market remains alive. There are successive supports between 10,600 and 10,700, and then at 10,300-10,400. The 10,600 support held during a brief sell-off last week. 

A fall below 10,250 would push the index below its own 200-DMA and if that happens, it could indicate 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 major low was 9,951 (March 23) and a fall below that would confirm a big bear market. In the longer-term, 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 a clear indication of the long-term trend. The index needs to move above 10,783 (recent peak on May 2) to register higher highs. 

Domestic institutional investors were net buyers to the tune of Rs 84 billion in April, and they are net buyers of Rs 6.7 billion (until May 4). Foreign portfolio investors (FPIs) sold Rs 55 billion in April and they have sold Rs 29 billion in May. Retail sentiment is positive. The FPIs sold Rs 100 billion of rupee debt in April and they have sold Rs 34 billion so far in May. The negative FPI attitude has been a factor in pushing the rupee down, to Rs 67.13/dollar. 

Breadth is positive in the F&O segment and there is more volume in net winners. The put-call ratio is bullish in the Nifty options segment. Trend-following signals suggest holding a buy on the Nifty with a stop at 10,600. The one negative signal is a rising VIX, which indicates rising nervousness.

The bounce in banks has been quite strong. 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 and is currently held at 25,900.

A strangle with long May 31, 24,800p (124), long May 31, 27,000c (54) could be hit in four trending sessions. It is zero-delta. This long strangle can be offset with a short May 17, 24,800p (36), short May 17, 27,000c (15). The net position costs 127. Note the a symmetric premiums, the put is priced much higher.

The settlement could get very volatile. Apart from corporate results, there’s domestic political news flow, and global news flow. The Karnataka elections are coming up. Crude prices could swing, given US threats of sanctioning Iran. Plus, there’s US-China trade talks.

The Nifty closed at 10,715 on Monday. A bullspread of long May 10,800c (102), short 10,900c (62) costs 40, pays a maximum 60, and it is 85 points from money. A bearspread of long May 10,700p (120), short 10,600p (88) costs 32, pays a maximum of 68. This is 15 points from money. The bearspread risk : reward ratio is favourable.

Given a long settlement, wider spreads like a bullspread of long 10,900c (62), short 11,000c (35), or a bearspread of long 10,600p (88), short 10,500p (63) are possible. This bullspread costs 27, pays a maximum 73 and is 185 from money. The bearspread costs 25, pays a maximum 75 and is 115 from money. A combination is not zero-delta. It would cost 52, pay 48, and cover a swing of 2 per cent in either direction.