Intermediate trend is positive

The recovery strengthened, going into settlement. Net institutional support is nominal but the Nifty tested resistance at 5,850. The Nifty has risen close to 350 points (about 6.5 per cent) in the past eight sessions, from its 2013 low of 5,477 on April 10.

The main driver is expectations of a big rate cut in the May 3 credit policy review. The net FII and DII exposure in April is roughly Rs 250 crore worth of net buying. So, retail and operators have been responsible for driving up indices.

The short-term trend is hitting resistance at 5,825-5,850. If it crosses that, it will hit resistance every 25 points up but it could move till the 5,950-6,000 level. The intermediate trend is positive, since we've seen a succession of higher highs. Since this intermediate trend is only eight sessions old, it could last a while. The long-term trend is a question mark. The pullback above the 200 Day Moving Averages (DMA) suggests it is positive. The Nifty would have to ideally, stay above the 200 DMA (about 5,675 now) or failing that, stay above 5,477 to maintain a bullish profile. On the upside, it needs to beat 5,844.

Political instability is likely to build up. There will be further controversy centred on the 2G scam, coal blocks, etc. The results season will exert its own stock-specific pressures. Moving average systems involving the 10 DMA and 20 DMA do not yet show a buy signal, since the 10 DMA is below the 20 DMA. However, this is a lagging signal, so it cannot be taken as definitive.

There are contrasting signals from the IT industry and financials. The CNXIT, where heavyweights such as TCS, Infy, HCL Tech, Mindtree and Wipro have declared results, is down over 14 per cent in April. The Bank Nifty is up almost 13 per cent. Financials have a bigger weight in the Nifty and the Bank Nifty is very high-beta.

The Bank Nifty is responding more to expectations of rate cuts at the credit policy announcement on May 3, than to results, though YES Bank and HDFC Bank have done well. NBFCs have also gone up in the hope of a rate cut. The Bank Nifty has support at 12,350-12,400 and it's likely to cross 13,000 before the credit policy if the bullish momentum is maintained. Any long May futures positions in the Bank Nifty should have stop losses in the 12,250-12,300 range.

There has been a fair amount of carryover. The Nifty could ride bullishly through settlement. It was up 75-odd points on Wednesday on the Singapore Exchange (around 5,910 levels). There's strong support at 50-point intervals on the downside. The put-call ratios (PCRs) are not strong indicators close to settlement. But PCRs are bullish for what it's worth.

May is likely to be a trending month with a good chance of a five per cent swing. So, options traders can look for positions at a distance from money, The Nifty is at 5,836. A look at open interest (OI) and relative premiums suggests short-term expectations (next five sessions) are ranged between 6,000 and 5,500 with OI falling away sharply beyond the May 5,500p and the May 6,000c. The downside bias in the option chains is noteworthy. A May bullspread of long 5,900c (81) and short 6,000c (44) costs 37 and pays a maximum 63. A May bearspread of long 5,800p (79) and short 5,700p (49) costs 30 and pays a maximum 70. A trader could take strangles further from money. A long 6,000c, long 5,700p, offset by a short 5,600p (30) and short 6,100c (21) costs net 42 and has breakevens at 5,658, 6,042.