Breakout past 9,450 can push Nifty to 9,550-9,575

The market touched a succession of new highs and it is now testing resistances above Nifty 9,450. The main driver is domestic retail. There is no real selling pressure since both domestic and foreign institutions seem to remain net bullish. But, net buying volumes have eased down and domestic institutions have done some selling. 

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 (RBI) more powers to resolve NPAs. The GST is also said to be proceeding more or less on schedule though there is an influential lobby that favours delay till September. 

The Nifty climbed past 9,400 and hit a new record high at 9,450 on May 11. The index has managed to stay above 9,400, even though there's been stray moments of selling. Resistance in that zone is critical in the short-term. The index could correct down to the 9,270-9,275 zone if there's any selling. On the upside, a spurt till 9,550-9,575 could come if there's a breakout past 9,450. The next strong support below 9,250 is at 9,100-9,125. 

Volumes were low, with the VIX also low. Institutional attitude is cautious. Essentially the market could swing considerably on any trigger, in either direction. The put-call ratios are bullish, maybe indicating an overbought market at 1.3. The Advance-Decline ratio are quite bullish, indicating retail interest. The dollar stays range-bound at 64.05-64.50. 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 19 per cent. Any intermediate correction could last 4 weeks or more, and a correction till 8,800 would be on the cards if there's a full-blown intermediate downtrend. The global attitude still seems to be strongly pro-emerging market and EU stocks are also performing. The US seems to have gone off the boil slightly. IT sector and Pharma stocks are seeing selling. Energy stocks, especially PSUs have seen strong buying.  

The Nifty Bank has hit successive new highs, supported by the new banking ordinance. However selling has followed, above the 22,850 level. The "Bank" is trending at about 22,800 now. A strangle of long May 25, 23,300c (27), long May 25, 22,300p (51) has asymmetric premiums although the strikes are almost 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 slightly by selling short May 18, 22,300p (8), short May 11, 23,300c (7). If either short position is struck, the corresponding long position will gain in value. 

The VIX remains very low and is trending lower. That's bullish. The May Nifty call chain has peak open interest (OI) at 9500c, 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 9,445. A long May 9,500c (36), short 9,600c (10) costs 26 and pays a maximum of 75. This is 55 points from money. A long May 9,400p (41), short May 9,300p (20) costs 21, pays a maximum of 79 and is 45 points off the money. These two spreads can be combined for a long-short set of strangles which are almost zero-delta. This costs 47, and pays 53, with breakevens at 9,547, 9,353.  

Trend following systems would suggest staying long in the Nifty futures, with a trailing stop at about 9,300 points. Be wary of going short until and unless the index drops, combined to a negative advance-declines ratio, and strong volumes in losing stocks.