Q4 results, Lok Sabha elections to decide stock markets direction

The HDFC Bank counter witnessed volumes of Rs 21 billion in the cash segment
The Nifty is testing resistance close to its all-time high, but there are also signs of nervousness. The next six weeks will see release of fourth quarter corporate results and more importantly, in terms of sentiment, there are general elections. 

There could be violent swings in this period. The Reserve Bank of India (RBI) monetary policy review declared a rate cut but that had been discounted. The market has seen net losses since then. The RBI is also going to infuse more liquidity. Balanced against that, it cut estimates and warned about a likely slowdown. 

The foreign portfolio investors remain strong net buyers, but domestic institutions have sold in April. The rupee has lost a little ground in the last five sessions. A weaker rupee could boost sentiment in the information technology sector where results start flowing this Friday. 

The Nifty ran up 7 per cent to recent highs above 11,700 after it broke out beyond 11,000 a month ago. It has topped out at 11,739, which is just a hair’s breadth below the all-time high of 11,760. Some technical analysts would interpret this as a negative double-top signal, indicating that the resistance at these levels is hard to break.   

The movement is likely to be heavily influenced by political newsflow, with less emphasis on corporate results. Session volatility is not very high, but the Vix has climbed quite a lot in the past few sessions.

The Nifty hit its all-time high of 11,760 in August 2018 and it retracted to a low of 10,005. From early December, the Nifty range traded between 10,500 and 11,000, before it made a failed breakout above 11,000, around the Budget session, before breaking out again in March. 

The Bank Nifty hit a new all-time high of 30,648 on April 1. It has retracted 2.5 per cent in the next five sessions. This could be a leading indicator for the broader market. A strangle of Apr 25, long 31000c (96) and long 29000p (127), can be offset by a short Apr 18, 31000c (33), short 29000p (64). That cuts net cost to 128. This calendar spread is safe enough because the long Apr 25 strangle will compensate if there’s a breakout before April 18.  

The Nifty is at 11,604. A bull spread of long Apr 25, 11800c (77), short 11900c (46) costs 31 and pays a maximum of 69.  A long Apr25, 11400p (50), short 11300c (36) costs 14, and pays a maximum 86. The combination costs 45 and pays 55, with breakevens at 11355, 11845. 


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