If the NDA does win a stable majority or puts together a government with a reasonable shot at stability, there is a fair chance of 'only buyers' situations, with prices driven up sharply
The Nifty has hit resistance above 6,775 and has found support at 6,650. A range-trading pattern may develop between 6,650 and 6,775. This is almost uncharted territory after a stunning bull-run through the four weeks. Volatility and implied volatility are climbing, with polling underway.
The market is still in a bull run. The 200-Day Moving Average (DMA) is way below at 6,050-6,060 levels. On the upside, the Nifty must beat 6,776 to hit new highs. On the downside, it has support at 50-point intervals. The first key level to watch on corrections is 6,350-6,400.
This is going to be a volatile, news-driven period dominated by electoral considerations. As of now, the trend looks very positive. The major driver has been foreign institutional investor (FII) inflows. Domestic institutions have been sellers.
It seems that retail has been selling larger stocks and entering smaller counters. The advances to declines ratio has been steadily turning more and more positive, which is an indicator that retail investors are driving up the prices of smallcaps and midcaps. Some of that money has come from selling off holdings in larger stocks.
If the National Democratic Alliance does win a stable majority, or puts together a government with a reasonable shot at stability, there is a fair chance of 'only buyers' situations, with prices driven up sharply. Anything beyond 6,776 is a new zone, so target projections are difficult.
A look at open interest (OI) in the Nifty May and June options segment offers some insight on expectations. There's a lot of open interest in June 7,000c and 7,500c, and OI in the 6,000p and the 5,000p. The December 2014 series also shows OI in the 8,000c and the 5,000p. This means limit of expectations is roughly 8,000 and 5,000. That's roughly 25 per cent down and 20 per cent up.
The call OI in May, June and December also far exceed the put OI, while puts far exceed calls in April. A put-call ratio (PCR) of less than one is generally considered bearish and signals an overbought market. Vice versa, a PCR of over one is generally considered bullish.
In this case, while the April spot market and the May-June derivatives market may all be technically overbought, the bull-run could continue. Strong uptrends can run up for months, while the technical indicators scream "overbought". But any possible correction in May/June is expected to be deep and steep.
The VIX has climbed. A high and rising implied volatility indicates rising fear and is generally seen as bearish. The VIX is very likely to continue climbing until May 16. But this scenario of a long general election is unique to India and one can't generalise with any confidence by comparing VIX behaviour in other markets. My intuition is that the VIX might rise along with a rising market.
As of now, the trader gets good risk-reward equations with April Nifty spreads bang on the money. A bullspread of long 6,700c (88) and short 6,800c (40) costs 48 and pays a maximum 52. This is great, with the spot Nifty at 6,695. A bearspread of long 6,700p (54) and short 6,600p (26) is even better, costing 28 and offering a maximum return of 72. A combination of these two would give a long straddle on the money covered by a wider short strangle. It costs 76 and pays a maximum 24.
A strangle combo of long 6,800c, long 6,600p and short 6,900c (15) and short 6,500p (12) costs a maximum of 40 with breakevens at 6,560, 6,840. The maximum return is 60 and if there's a lot of volatility, there's a chance of returns from both directions.
