Market is still in a strong bull run

The Nifty has reacted from resistance in the 6,810-6,820 zone, where it has hit historic highs recently. Poor wholesale inflation data and manufacturing data have put a temporary brake on the bull run in this truncated Easter week.

The market has support at roughly 50-point intervals and it has been hitting higher highs with monotonous regularity. The 200-Day Moving Average is way below current trading levels at around 6,075. This short-term correction could find support at 6,650 or if it moves below that level, at 6,600. The first signal that the intermediate trend might be changing would be a drop till 6,350-6,400.

Given that the market is still in a strong bull run, the current correction will most likely lead to a range-trading pattern between 6,650 and 6,800. Volatility is up. Expiry effects are visible in the April series. The May and June options segment have significant open interest - not surprising, given the election schedule.

The major driver for the bull market has been foreign institutional investor inflows. Domestic institutions have been sellers.

Obviously, the current trading patterns are dominated by electoral considerations. However, fourth quarter, and full-year results will probably have focussed impacts on specific stocks as the results season gets underway. Macro economic data has been poor but this is of tertiary concern at the moment. If the National Democratic Alliance does win a stable majority, or puts together a government which has a reasonable shot at stability, there is a fair chance of 'only buyers' situations arising. Anything beyond 6,820 is a new zone, so target projections are difficult.

A look at open interest in the Nifty May and June options segment offers some insight on extreme ends of expectations. There's a lot of open interest (OI) in the June 7,000c and 7,500c, and also OI in the June 6,000p and the June 5,000p. The May call chain has big OI bulges at 7,000c, 7,500c and 8,000c with the put chain has massive OI at 6,000p with some OI distributed down to 5,000p.

The Put-Call ratio (PCR) is bullish across the three month series at 1.2 with the April PCR looking more bullish at 1.3. However, the OI patterns do suggest that some optimists are looking for a climb till 8,000. That would be 20 per cent return within a time period of 6-10 weeks. Some pessimists are also hedged against possible falls till 5,000 - that's 25 per cent down.

The market is already technically overbought. The Nifty has risen eight per cent in the past six weeks. However, the bull run could obviously continue. In particular, if domestic institutions turn positive, the market could zoom into a steeper orbit.

As always, keep watching the BankNifty and the IT index. The BankNifty is high-beta - it will push the broader market. The IT index could be a good hedge if the rupee starts weakening again. My sense is that the Reserve Bank of India will have to intervene and buy dollar if the rupee strengthens any more and any central bank action at the moment would be taken as a strong signal. The trader gets good risk-reward equations with April Nifty spreads near the money with the Nifty held in-between 6,700-6,800. A bullspread of long 6,800c (34) and short 6,900c (10) costs 24 and pays a maximum 76. A bearspread of long 6,700p (33) and short 6,600p (12) costs 21 and offers a maximum return of 79. A combination of these two would give a long strangle at 6,700p, 6,800c with a wider short strangle at 6,600p, 6,900c. This costs 45 with a maximum return of 55 and breakevens at 6,655, 6,845.