Fresh fall likely if Nifty loses support at 5,400

The Nifty failed to breach the higher-level resistance and closed near the day’s low on profit-booking by small and mid-sized traders.

Thankfully, the index did not break below the most crucial support of 5,400. If the market breaks below this level, the next support for Nifty February futures is around 5,360. For spot Nifty, the time-price opportunities-based support is seen at 5,372 and volume-based short-covering may come around 5,332.

The February futures settled at 5,429, a 12-point premium to the spot, and added 1.84 million shares in open interest, significantly lower than the intra-day build-up of 4.33 million shares.

The trade summary matrix shows buy trades from top traders and selling pressure from mid-size and small traders. The initial balance range (5,498-5,542) saw extremely poor volumes (13.4 per cent) through change of hands, indicating resistance above 5,498.

Trading in call and put options hints at a fresh downside if the Nifty loses support at 5,400-5,350. There was profit-booking in the 5,200-5,300-strike call options, with fresh short build-up in the 5,400-strike call options. The 5,500-strike call added 2.78 million shares in open interest through sell-side trades, indicating resistance for the Nifty above this level. Participants covered short positions in the 5,500-strike put options, as they expect the Nifty to stay below this level.

The domestic equity market has dropped more than 10 per cent in the last one month. According to a study by Morgan Stanley, historical evidence suggests this is the 26th occasion in 30 years when the market has dropped more than 10 per cent in a month. However, 10 of the 25 previous occurrences happened in the two worst bear markets of the past three decades – 1992-93 and 2008.

These corrections were accompanied by good returns in the subsequent three months, when the market entered a bull phase. The average subsequent three-month return for the 25 corrections was only four per cent. These statistics are depressed due to the market performance in 2008.