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The stock market bounced as sentiment improved, with positive global cues. The Nifty has climbed 350 points to lift above its own 200-Day Moving Average (200-DMA) after briefly dipping to test support at around 8,000 last week. The institutional position last week saw foreign institutional investor (FII) selling being matched by domestic institutional buying with retail as net sellers. On Monday, FIIs were buyers again.
However, it will require sustained institutional buying to pull the market back into a clearly bullish intermediate phase. This rally started from a low of 7,997 on Thursday May 7. It has moved till 8,325, which is marginally lower than last Monday (May 4), when it closed at 8,332.
The short-term trend seems positive. Breadth is positive and volumes are reasonable. This range has been heavily traded. The index could see a strong snap back if the sentiment has truly turned around.
The index broke above the 200-DMA on Monday, which is a good sign. But the pattern of lower lows continued with 7,997 (low May 7) below 8,144 (low, April 30). There is resistance at every 50-point interval on the upside.
The index would have to push past 8,850 (peak of April 15 was 8,844) to generate higher highs and confirm an intermediate uptrend. Ideally, it would have to beat the all time high of 9,119 (March 4) to confirm the big bull trend.
On the next correction, the index should stay above 7,997, and it should ideally, stay above the 200-DMA, which is currently ranged between 8,190 and 8,290 (Exponential 200-DMA-Simple 200-DMA). As of now, the correction went for 1,122 points or about 12 per cent across 8 weeks. This is time enough for an intermediate downtrend to have completely played out but we cannot confirm this of course.
The Q4 results are still coming in. Parliament is ending an extended session. That means there remain plenty of domestic triggers for sentiment changes and of course, external issues will influence traders as well. As of now, a rate cut in China, decent employment data from the US and a clear majority for the Tories in the UK elections have helped to revive the bulls. But of course, sentiment could change in a hurry and the market is likely to remain extremely volatile. Crude prices remain worth watching and so do forex rates. The rupee is pulling back from above 64 versus dollar and the pound could also see a run-up against most other currencies.
The Bank Nifty hit support near its own 200-DMA at about 17,250 and it has bounced back till 18,200. The pattern here should be similar to the Nifty. The PSU banks are mostly due to declare results (Bank of Baroda's Q4 was well received) so, the action will centre on these stocks. The response to State Bank of India's results (May 22) could be critical.
The Nifty's put-call ratios look healthy enough at about 1.15. The May Call chain has open interest (OI) peaking at 8,500c, with ample OI till 9,000c. The May Put OI peaks at 8,000p but it is ample till 7,700p.
There is plenty of time left. Traders could hope for a pretty large movement in either direction, or perhaps, both directions.
A bullspread of long 8,500c (63), short 8,600c (36) costs 27 and pays a maximum 63. This is about 175 points from money. A bearspread of long 8,200p (80), short 8,100p (56) costs 24 and has a maximum payoff of 76. The bearspread is 125 points from money. They can be combined to set up a long-short strangle set, which costs 51 and pays a max 49.
