Nifty has once again managed to reel back towards its 200 DMA (day moving average), a crucial market gauge of the underlying trend, this time, however, from the downside.
The benchmark index closed below its 200 DMA for a second consecutive session on Monday even after retracing its intraday decline. Traders expect this development to keep the market in a check, especially if unlike Monday, the Nifty fails to rebound from the crucial 5,000-mark.
According to a trader, the Nifty?s fall below this indicator (currently at 5,115) highlights the bearish underlying tone of the market.
?Given how effectively, the 200 DMA has acted in last one and half year as a resistance for the most part of 2011 and then a support for the last two months, the Nifty?s descent below it, indicates that the market sluggishness of last one month may have turned into a bearish phase after all,? he added.
Generally, the Nifty?s position with respect to its 200 DMA indicates the underlying tone of the market; the trend is considered bullish if the Nifty quotes above its 200 DMA and bearish if it?s below this benchmark.
Following the market top in November 2010, the Nifty moved below its 200 DMA in January 2011 and after five failed attempts through 2011,managed to overtake this hurdle in early February 2012, subsequent to a 15% rise in the market since start of the year.
Traders also point out that FIIs (foreign institutional investors) have been actively buying put options in the last few trading sessions and have shifted their exposure to lower strike prices, factoring in a possible correction.
?Monday?s market rally post the announcement of GAAR deferral in which the Nifty swung from a decline of 2% to a gain of half a percent appears to be sentimental in nature and a result of short-covering,? says Siddarth Bhamre, head of equity derivatives with Angel Broking.
According to Bhamre, the market is however, likely to find resistance in the 5,100-5,150 range and may continue its slide towards 5,000 mark. ? If the Nifty fails to hold grasp of 5,000-mark, the decline could further extend towards 4,850-4,800 levels,? added Bhamre.
On Friday, while traders increased their exposure to May 5,000 puts, with the strike obtaining the highest open interest for the session on the put side, on Monday, the put writing was concentrated in the lower strikes, in the range of 4,600-4,900.
In particular, 4,600 puts have added substantial open interest in the last two trading sessions, on average reporting an increase of 10.9 lakh shares.