The market touched a new high but also saw a small correction. The French election results led to a small relief rally since Macron's victory was discounted. The central bank policy reviews by the Euro Central band and the US Federal Reserve were both low-key affairs. Both maintained status quo as expected and neither said anything earthshaking. Consensus opinion favours dollar another policy rate at the next review.
India-specific events still look favourable with reasonable corporate results and a thrust on reforms continuing with the new bank ordinance, which gives the Reserve Bank of India more powers to resolve NPAs. The GST is said to be proceeding more or less on schedule though there is an influential lobby that favours delay till September.
The Nifty climbed past 9,350 and inched to a new record high at 9,377 on May 5, just beating two prior highs of 9,367 (April 26, April 27). This could actually count as a bearish triple-top signal since there's hardly any difference.
Resistance in that zone is critical in the short-term. The index corrected down to the 9,270-9,275 zone. A breakout and close above 9,375 could push the Nifty till 9,500, while support at the 9,250-9,275 zone looks crucial on corrections. The next strong support below 9,250 is at 9,100-9,125. Volumes were slightly low in the past few session due to "fence-sitting". Advance-decline ratios strengthened on Monday but there was selling at higher levels. The put-call ratios (PCR) are mildly bullish but there isn't much in it. The May settlement has seen net institutional selling with FPI sales slightly exceeding net buying from domestic institutions. There has been retail buying but it has mainly been focussed in smaller stocks. The dollar stays range-bound at 64.15-64.50. Traders could consider going long on the dollar/rupee purely on technical grounds.
The index started moving North in late December from 7,900 levels. It has gained over 18 per cent. Any intermediate correction could last 4 weeks or more, and a correction till 8,800 would be on the cards in a full-blown intermediate downtrend. The global attitude still seems strongly pro-Emerging Market. However, IT sector and Pharma stocks are seeing selling. Energy stocks, especially PSUs have seen strong buying.
The Nifty Bank also hit new highs, supported by the new banking ordinance. However selling has followed, above the 22,800 level. The bank is trending at about 22,767 now. A strangle of long May 25, 23,500c (40), long May 25, 22,000p (76) has asymmetric premiums although the strikes are more or less equidistant from money. There is a downside bias. Either side of this strangle would be hit given two big trending sessions. The cost can be offset by selling short May 11, 22,000p (35), short May 11, 23,500c (18). If either short position is struck, the corresponding long position will gain in value.
The VIX remains very low. That's bullish. The May Nifty call chain has peak open interest (OI) at 9,500c, and high OI at every strike until 10,000c. The May put chain has very high OI at every strike down to 8,000p with peaks at 9,200p, 9,000p, 8,800p and 8,500p.
The Nifty is at about 9,315. A long May 9,400c (52), short 9,500c (21) costs 31 and pays a maximum of 69. This is 85 points from money. A long May 9,300p (67), short May 9,200p (39) costs 28 and is just 15 points off the money. The close-to-money bearspread is underpriced. It pay a maximum of 72.
Trend following systems would suggest staying long in the Nifty futures, with a trailing stop at about 9,100 points. Be wary of going short until and unless the index drops, combined to negative advance-declines ratio, and strong volumes in losing stocks.
