Nifty to trade in 6,350-6,850 range over 10 sessions

If the FII buying run continues at the same pace for the next 6 weeks, much higher index levels could be attained

The market has continued trending up through the past 15 sessions. The foreign institutional investors (FIIs) are betting on a decisive election victory which puts Narendra Modi in power. Momentum traders have bought speculatively once the Nifty broke past the 6,400-level.

The long signals remain in force, with the Nifty hitting successive new record highs. The market has pushed above 6,600. This is entirely new territory, so target-setting is not accurate. Based on market behaviour during previous elections, the market could trend up until the polling ends. Results are due to be announced on May 15 — this implies five to six weeks of rising prices is possible. A short-term target of 6,800 can also be computed on the basis of the breakout in early March.

If the FII buying run continues at the same pace for the next six weeks, much higher index levels could be attained. However, domestic institutions are net-negative in March and by implication, retail is also net negative. Heavyweights, which receive FII backing, are doing much better than smaller stocks and the ratio of advances to declines has not been very strong, although it’s positive. A positive change in sentiment from DIIs or retail could give more thrust to the rally.

Volatility is up. Pullbacks on profit-booking, or changes in sentiment could take the Nifty back till 6,450. Below that, there’s support at every 50-points. On the upside, if the election results do indeed deliver a stable Bharatiya Janata Party (BJP)-led government, the market could go up much further, since the euphoria would spread.

Reversal in sentiment could occur if there’s some perceived setback for the BJP’s prospects or some geopolitical blow-up. One obvious issue could be Crimea. This might lead to a spike in international crude oil and gas prices.

  The rupee has strengthened to 60.25 versus the dollar – this is mainly on the back of FII inflows. The trader needs to be careful in following this trend however since any dollar bounce could take it back till 62 levels. The US Federal Reserve has confirmed it will accelerate the pace of tapering and the new chairperson also hinted she might raise US interest rates sooner than the market hoped.

As a result of the stronger rupee, traders and investors have rotated out of information technology, fast-moving consumer goods and pharmaceuticals and into sectors like capital goods, oil and gas, metals and, above all, financials. The Bank Nifty has outperformed the overall market as it usually does in a bull run. It could continue to exhibit its high-beta performance. Private sector banks are safer but public sector banks are more beaten-down and. hence, might have greater upside while this rally lasts. More speculative action in non-banking financial companies may also be driven by bank licence awards. The Bank Nifty now looks set for a run till beyond the 13,000 mark. An April bullspread of long 12,800c (340) and short 13,000c (260) looks tempting. This could mean a maximum payoff of 120 versus a cost of 80.

The Nifty’s put-call ratio is into highly bullish/overbought zones. The VIX is up sharply, indicating that premia close to money have jumped. Traders should be braced for the Nifty to swing anywhere between 6,350 and 6,850 in the next 10 sessions.  A long April 6,700c (101) and short 6,800c (61) costs 40 and pays a maximum 60. A long April 6,600p (86) and short 6,500p (56) costs 30 and pays a maximum of 70. The spot Nifty is at 6,601, so the 6,600 put is on the money. There’s a huge skew in premia, with the on-the-money 6,600c being priced at 155 – nearly twice the equivalent put.