Strong support between 10,200 and 10,300 on Nifty

The Nifty finally reversed its rising trend, though it's too early to judge if this is a serious correction. The resistance appears to be between 10,600 and 10,650, the index saw selling pressure twice in that zone. This is well above the 200 Day Moving Average (200-DMA).

Obviously, a rise above 10,650 will indicate a continuation of the intermediate uptrend. A further breakout could have a target of 10,900. If the reversal continues on the other hand, the short-term pattern could be range trading between 10,300 and 10,650. There's strong support between 10,200 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. 

The index move above 10,450 established a pattern of higher highs. A breakout above 10,650 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 continuing bull-market. 

The gains in the settlement amount to around 3.8 per cent. The VIX has also dipped as the Nifty has risen, which indicates traders are less fearful. Breadth is positive in the F&O segment and there's more volume in net winners.

Domestic institutional investors (DIIs) have been net buyers to the tune of Rs 66 billion in April, while the Foreign portfolio investors (FPIs) are net negative to the tune of Rs 51 billion. Retail sentiment seems to be positive. Despite the FPIs being major buyers of rupee debt in April, the rupee continues to slide, and it's now down to 66.9/dollar. This should help information technology (IT) stocks in particular.

Trend-following signals suggest holding a buy on the Nifty with a stop at 10,250. 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. 

The bounce in banks was 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 25,500. However, the Bank has slid below its own 200-DMA again, at current levels of 24,800. 

A strangle on the bank with long May 31, 23,500p (120), long May 31, 26,000c (85) may be profitable. This could be hit in four big trending sessions in the upcoming long settlement. It is not quite zero-delta. This long strangle can be offset with a short May 3, 24,000p (24), short May 3, 25,500c (20). The net position costs 161. These calendar spreads don't offset each other. But, if the shorts are struck, the long premia will also rise. 

The Nifty closed at 10,570 on Wednesday. A bullspread of long May 10,700c (99), short 10,800c (59) costs 40, pays a maximum 60 and it's about 130 points from money. A bearspread of long May 10,500p (125), short 10,400p (95) costs 30, pays a maximum of 70. This is about 70 points from money. The risk : reward bias is favourable towards the bearspread, indicating traders expect the uptrend to continue.

A brave trader could sell these two positions, creating a combination of short-long strangles. The assumption is that there will not be much volatility over settlement and the premia will degrade by Monday when the positions can be reversed.

Apart from corporate results, there are risks associated with domestic political newsflow, or global newsflow, causing big swings. The Karnataka elections will surely influence moves in May. There is also the risk of a further rise in global crude prices. The China-US trade negotiations could have either a positive or negative effect.