Are the markets close to bottoming out?

Nifty can slip to 7,500 and faces strong resistance at 8,350 levels on the upside, analysts say

Despite the huge 723-point fall on May 6 and another 630-point plunge in the S&P BSE Sensex on May 12, the intermittent recovery in the markets has been quite sharp. While the bears pulled down the 30-share benchmark by around 1,566 points during May, the index has, in fact, gained nearly 1,761 points till May 14.

Simply put, the S&P BSE Sensex has gained 195 points, or is 0.7 per cent higher as compared to its close on April 30. However, the month has been choppy for the markets due to the steep fall and the ensuing recovery.

Given the tussle between bulls and bears in May, India VIX, a gauge of volatility has shot up from a level of around 12 in April-mid to over 21.9 levels in intra-day trade on Thursday, a jump of nearly 80 per cent. VIX has a negative co-relation with the Nifty. Every time VIX rises, it means that a market fall is imminent.

Analysts attribute the volatility and the sharp fall in market over the past few sessions to the selling by foreign portfolio investors (FPIs)/foreign institutional investors (FIIs) in index-based long positions and expect this to continue for some more time. By buying options, they get the benefit of deploying lesser funds for an exposure in the market, they add.



“There is some more volatility left in this market. FPIs/FIIs have been squaring off their index-based long positions and are shifting into index options. As a result, the implied volatility (IV) is rising. Thus, despite the minimal fall seen over the trading days in May, the IV has moved up from around 12 per cent to around 22 per cent. The open interest (OI) has also reduced. At the same time, the FIIs have also been selling in the cash market,” Siddarth Bhamre, head of research (equity derivatives and technical) at Angel Broking, says.

 

Outlook
Going ahead, analysts expect the markets to remain range-bound over the next couple of quarters. The probability of rate hike by the US Federal Reserve going ahead, coupled with euro-zone fears especially Greece besides any rise crude oil prices would keep rupee/dollar rates volatile and thus the Indian markets as well, they say.

Chandan Taparia, derivatives analyst - equity research at Anand Rathi, however, feels that the Nifty should find support at 8,000 levels even though the upside remains capped.

“We expect the markets to bottom out soon and volatility to cool down. Despite the sell-off, the Nifty has been able to find some support at 8,000 to 8,080 levels and there has been support – based buying in a number of stocks, including banking and capital goods counters. There has been buying at lower levels in a lot of stocks,” he says.

Adding: “In case the Nifty breaks 8,000 on the downside, it can slip to 7,850. However, a sharp recovery from those levels is not ruled out. On the upside, it has been facing resistance at 8,340 levels. Only if it sustains and closes above 8,340 levels we can hope for some recovery in the markets.”



Bhamre of Angel Broking feels that the Nifty could drop to 7,500 levels going ahead and the corresponding level for the Sensex would be around 25,000. “We are not in a hurry to make new all-time highs. There are chances that the Nifty can spend the next one year between 7,500 to 9,000 levels,” he says.