Uptrend in Nifty to continue unless exit polls vary from actuals: Traders

The Bombay Stock Exchange building on Dalal Street in Mumbai
The Nifty has zoomed on the basis of exit polls predicting a strong NDA performance. The market opened high on Monday and ended with a move that exceeded 4 per cent. However, the results are due on Thursday and coincide with weekly options settlement. If the results don't match the exit polls, there will be a lot of volatility.  

The index jump was backed by a sharp drop in the VIX from record levels. Traders expect the uptrend to continue unless the exit polls vary from actuals. The rupee also hardened due to strong FPI buying on Monday.

But there are negative global factors, even assuming the exit polls are correct. Crude oil is up due to the US-Iran face off. The trade war between the US and China has intensified. Brexit remains a chaotic affair. India's macro-economic variables are poor, Q4 corporate results were poor, and market valuations are very high.

The Nifty ran to all-time highs above 11,850 on April 18 after a breakout beyond 11,000 in mid-March. It is testing those all-time record levels and will, almost certainly breakout, in the next two sessions. The upside target could be 12,200-12,300.  If May 23 throws up surprises, there could be a crash. In that case, the 11,000-11,100 range will be tested again. A drop below 11,000 will mean a short-term target of 10,500.

Session volatility in terms of high-low range is up and will stay high. The Bank Nifty hit an all-time high, of 30,827 on Monday. Since it is highly correlated with the Nifty and has high positive-beta, it could outperform. A strangle of May 30, long 32000c (295) and long 29500p (370) is very expensive with breakevens at 32665, 28835. This indicates there is still some nervousness about downsides.

The Nifty is at 11,828, with the futures at 11,871. A bull spread of long May 30, 12000c (176), short 12200c (105) costs 71 with maximum gain of 129, and breakeven at 12071. A long May 30, 11700p (172), short 10500p (117) has a net cost of 55, with maximum gain of 145 and breakeven at 11645.

Both spreads could be hit in the next three sessions if exit polls and results are at variance. If both spreads are taken, net cost is 126, with potential gains of 74. In that case, breakevens are at 12126, and 11574. In effect, this hedge gains if the market move roughly 250 points in either direction. 

That's about 2 per cent in the next seven sessions. The Nifty has averaged a daily move of 150-odd points in the past 10 sessions.