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Traders unwound their bullish bets on the market and mounted fresh short positions on Thursday after the Nifty fell below a key technical support. The Nifty fell below the critical 200 day moving average (DMA) for the first time since August 2012. According to analysts, this could lead to the index dropping by another eight per cent.
“Usually, when an index or stock falls below the 200 DMA, it declines by another six to eight per cent,” said A K Prabhakar, senior vice-president, Anand Rathi Financial Services. “This time, too, it is a possibility because most of the Nifty stocks are trading below this level.”
The index fell 1.7 per cent to close at 5,574.75 on Thursday, which is 1.1 per cent below the 200 DMA of 5,636, turning traders pessimistic about the near-term market outlook. The Sensex, which declined 1.6 per cent to 18,509.70, also fell below this crucial support.
“We were recommending liquidation of long positions soon after the Nifty fell below this level. Soon, many clients built short positions,” said Amit Gupta, head of derivatives at ICICI Direct. (CHANGE IN OUTLOOK)
The Nifty was hovering around the 200 DMA soon after the opening below this level on Thursday. The rapid decline started after 12:30 pm, when the selling resulted in the benchmark indices closing at a four-month low. Of the 50 stocks on the Nifty, 33 are trading below the 200 DMA. These include HDFC Bank, Reliance Industries, Hindustan Unilever and State Bank of India.
Analysts said the stocks that are just below their 200 DMA risk the possibility of a steeper fall than the ones which are away. So, HDFC Bank, two per cent below this level, is susceptible to a sharper fall than Reliance Infrastructure, almost 34 per cent away. “Stocks that are far away from 200 DMA could fall just in line with the index,” said Prabhakar.
Foreign institutional investors (FIIs) sold shares worth Rs 326.21 crore on Thursday, while domestic institutional investors bought to the tune of Rs 65 crore, according to provisional BSE data.
According to analysts, FIIs have been aggressively creating short positions in Nifty futures and options of late, indicating strong expectations of a further decline.
“Short positions in Nifty have been rolled over from February and more recently, there has been heavy open interest build-up in 5,400 and 5,300 puts,” said Gupta. When a trader buys Nifty 5,400 or 5,300 puts, it means he expects the index to decline to these levels.
Gupta did not rule out a brief rebound soon, but said it is a ‘sell-on-rise’ market.
“Even if the Nifty rises above 5,630, it may not hold unless the 5,750-mark is not crossed convincingly,” he added.
