Following a 9% correction from its two-year high, the Nifty fell below its 200-day moving average (DMA), a long-term directional indicator, for the first time since July 2012.
The benchmark?s descent below this crucial pointer — a negative cross-over between its 50- and 100-day moving averages — after nearly a year validates traders? fear of a prolonged market correction.
Generally, the relative position of the short-term moving average (50-DMA) with respect to the medium-term moving average indicates the underlying tone of the market; the sentiment is considered bullish when 50-DMA rides above 100-DMA and bearish if it?s trading below.
On Thursday, after shedding close to 100 points, the Nifty fell below its 200-DMA that currently stands close to 5,640. While the benchmark?s relative positioning to the pointer has discouraged traders, a decline of 50-DMA below 100-DMA may be pointing to a further downward move, at least in the near-term.
Since late 2007, three out of the four times, the market corrected at least 17% when such a negative cross-over took place, including the bear-market gasp after January 2008 and November 2010.
Market observers say that even a shift in the open interest of call and put options of the Nifty substantiates the selling pressure on upside rather than buying interest on the lower sides. According to a trader, on Friday?s trade alone, 60% of the top trades in the Nifty April future were short orders at higher levels that came through when the underlying index made intraday gains. ?We observed huge orders being placed near 5,593.2 levels, amounting to close to R500 crore worth of selling at higher levels, a second such instance since mid-February indicating directional exits,? the trader said.
Even as most of the traders are expecting the Nifty to dwindle towards 5,400-5,200 levels, they believe that in the near-term, 5,550 may turn out to be a critical level that decides the intensity of the fall.
?Even as the selling is accompanied by substantial volumes during the last three trading sessions, the market momentum appears oversold. November 2012 holds a key to the near-term market moves,? said Savio Shetty, derivatives strategist, Prabhudas Lilladher.
In Friday?s trade, the Nifty reached a low of 5,534.70, before closing at 5,553.25, down 21.5 points, or 0.4%. It, thus, avoided closing below the November 2012 low of 5,548.35, by a few points. The open interest in the Nifty options of the recently commenced April series shows concentration at the strikes of 5,600 and 5,700 levels on the call side. On the put side, both 5,400 and 5,200 strikes are observing build-up of open interest.