The long-term trend may have changed to bullish

Global sentiment continues to look strong but the focus is on central bank attitude. If the US Fed says it will go easy and the Bank of Japan (BoJ) also keeps liquidity flowing, global markets could be set for a surge. India-investors are also focussed on politics. Parliament has gone into session and there are assembly elections in progress. In addition, there are results out of earnings season.

The indices have picked up on the basis of several weeks of strong buying. The Nifty has crossed the important barrier of the 200-Day Moving Average (200-DMA) and it has closed above that indicator for several sessions.

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This could indicate the long-term trend has changed. The market had been bearish from March 2015 but the Nifty has now about gained 1,100 points from the Budget session low of 6,825. That is an impressive 16 per cent up in the space of eight weeks.

Profit booking has caused resistance above the Nifty 8,000 levels. Breadth has been good and volumes reasonable. Domestic institutions have done some selling but the FIIs were big buyers through March and April.

The rupee's immediate future would be determined by the Fed's actions and policy statements. Consensus opinion is that there will be no immediate action. But, the policy statement could be more dovish or hawkish than expected. The market is discounting at least one interest rate hike in 2016.

Traders will be unhappy if the Fed takes a more hawkish stance than that. If the Fed is hawkish, the dollar could climb again and that might push the rupee down despite the buoyancy caused by the steady inflow of dollar from FIIs. If the Fed is more dovish in its statement, the dollar could weaken again. Movements in the dollar-rupee could help to shape trends in the information technology (IT) sector. Most IT stocks are inversely correlated to the rupee and liable to gain if the rupee falls.

Traders are also discounting some sort of easing action from BoJ though it is hard to see what Japan's central bank may realistically do. It already has a QE programme and negative interest rates in place. If there is BoJ easing, the yen may weaken. There's significant volumes in the yen-rupee contract and that might be a buy if the yen looks like it will slide.

The Nifty Bank has seen quite a lot of volatility and that could continue. As of now, a strangle of long May 16,500p (226) and long May 17,500c (183) looks quite tempting. This is not zero-delta with the Bank Nifty at 16,870. But, either end of the strangle could be struck in a couple of big sessions. Breakevens are at around 16,090, 17,890.05.

Open interest (OI) in the Nifty call option chain for May has a big peak at 8,200c and then tapers off but there is good OI until 8,500c. The May put chain has big peaks at 7,800p, 7,500p and 7,000p. The Nifty's put-call ratios (PCRs) look quite oversold at between 0.7 and 0.8. However PCRs are usually not reliable close to settlement.

The Nifty closed at 7,980 on Wednesday. A bullspread of long May 8,100c (99) short 8,200c (62) costs 37 and pays a maximum 63 and it's about 120 points from money. The in-the-money straddle of long 8,000c (149), long 8,000p (119) has breakevens roughly at 8,270, 7,730. A bearspread of long 7,900p (84), short 7,800p (60) costs 24 with a maximum payout of 76. This is about 90 points from money. As always, selling such spreads with the intention of buyback within a few sessions could be quite profitable since the premium should fall after the settlement changes over.

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