A section of traders believes that the market may extend its recent fall by another 3-4% if the benchmark Nifty breaches the 5,900-5,880 levels. They say that the market movement of the last three weeks, when subjected to technical analysis, shows a pattern that hints at a further correction if these levels are breached.
Nifty?s gain since mid-May, and its subsequent retreat, has formed a pattern on the charts that is similar to a trend known in technical parlance as the ?head and shoulder formation? ?- which indicates a further correction. This could result in the 50-share benchmark losing another 200-250 points.
?The technical correction can take Nifty towards 5,600 levels if it falls below its 100 day-moving average (DMA),? said Rahul Bhandawat, senior technical analyst, Equentis Capital. On Tuesday, the Nifty closed at 5,919.45, down 4% from its May high and close to its 100 DMA ? a medium-term support that stood at 5,897.
Generally, the index?s position, relative to the moving averages like the 100 DMA and the 200 DMA, indicates the fundamental trend in the market. When the index trades above these moving averages, the trend is considered to be bullish; and bearish, if the index is trading below these pointers.
?Even the momentum indicators that represent the underlying market sentiment and extent of euphoria or pessimism at any point of time have room for further decline,? said Savio Shetty, d erivatives trader, Prabhudas Lilladher Securities.
Traders pointed out that the change in sentiment may already be reflecting in the net FII exits in the index futures in the last two trading sessions even as their cash-market selling remained muted.
As per Bloomberg, foreign investors sold R2,900 crore worth of index futures ? primarily Nifty futures ? this week so far, the first such withdrawal since mid-April.
The recently commenced June series of derivatives also highlights the rising put writings at lower strike prices of 5,700 and 5,500, signalling that the proportion of investors expecting a fall in the market is rising.
But not all agree with the view that the Nifty will breach 5,900 levels anytime soon. ?Currently, the correlation of the Indian market with factors like fund outflow from emerging markets and the weakening rupee is low. Hence, for the market correction to deepen, the correlation has to strengthen,? said Shubham Agarwal of Motilal Oswal Securities.