Series of strong resistance at higher levels

The market has trended up steadily through the past week. The recovery has pushed the Nifty past 8,800. The rise has been backed by very positive breadth, with mid-caps and small-caps moving up more than larger stocks. This pattern of small stocks' outperformance is a sign of strong retail enthusiasm. We have a rare situation where institutional consensus is also bullish. However, volumes have been moderate.

The market has pulled above 8,825, from a recent low of 8,269. The 200-day moving average is trending at about 8,200. So, a nine per cent correction from 9,119 to 8,269, has been followed by seven per cent recovery.  

This zone has been heavily traded earlier and there is congestion at every 50-point interval. Hence, there will be a series of strong resistances. Ultimately, the market must cross 9,119 and establish new highs. So, 9,119 and 8,269 remains key levels to watch. A move above 9,119 will confirm that the bull market is still running, while a fall below 8,269 would cause worry.

A rate cut did not happen at the Reserve Bank of India (RBI) policy review last week. The inflation data released this week (indicating that March retail inflation fell to a three month low) could nudge the central bank into loosening. But the RBI Governor's point was that two prior cuts of January and early March had not yet been transmitted. RBI will probably wait for commercial rate cuts, which now seem to be happening. The Q4 result cycle is also starting and that will provide triggers. Early bird IT and Pharma results could be very interesting since the rupee was strong through Q4 and that could hurt exporters.

Overseas, the European Central Bank's bond buying programme has ensured ample liquidity. The pound could now see speculative hammering since the UK is headed into elections in early May. The rupee looks a little over-valued and RBI may nudge it down to stimulate exports.

The Bank Nifty is range-trading between 18,500 and 19,000. An optimistic breakout could push it beyond 19,500. A long 19,500c (105), short 20,000c (40) was well off the money and quite cheap on Monday. But, two good sessions could pull the Bank Nifty to those 19,500 levels so this is a tempting position.

The Nifty's put-call ratios (PCR) have moved into positive territory. The three-month and one-month PCRs are at around 1.25 and 1.4, respectively. The April Call chain has open interest (OI) peaking at 9,000c, with another bulge at 9,200c. The April Put OI is ample between 8,000p and 8,800p with peaks at 8,000p and 8,500p. 

The index was held at 8,834 with the futures at 8,857. The April Call chain is 8,900c (74) 9,000c (38), 9,100c (17), 9,200c (8) etc. The Put chain is 8,800p (75), 8,700p (48), 8,600p (31), 8,500p (20), etc. A bullspread of long April 8,900c, Short 9,000c costs 36-37, with a maximum payoff of 63-64. This is about 65 points from money. A bearspread of long 8,800p, short 8,700p costs 27 and has a maximum pay of 73. The bearspread is 35 points from money.  A two-way Nifty strangle set of long 9,000c, long 8,700p, short 9,100c, short 8,600s costs 38, with maximum payoffs of 62. Breakevens are at 9,038, 8,662.

Another possibility: A butterfly with one long 9,000c, two short 9,100c, one long 9,200c. This costs a net 14 (ignoring brokerage). It has a maximum payoff of 86 at 91,00 with breakevens at 9,014, 9,186. The point is that the Nifty will hit very high resistances near 9,119 (previous high), assuming the uptrend stays in force.