Derivatives and technical analysts expect the Nifty to slide below the psychological 8,000 mark in the coming sessions, with the index breaching its previous support level of 8,555 on Wednesday.
According to experts, the Nifty has continued to form lower top-lower bottom formations, a trend seen in the last five weeks, and witnessed sharp selling towards 9,700 zones. On Wednesday, the Nifty ended at 8,468, down 5.5 per cent over the previous close. The Sensex closed below the 29,000 mark.
“The options open interest (OI) activity has been scattered at different strikes, with several put writers getting trapped in the recent fall. The put unwinding, weakness in banking and heavyweight counters, and FPI selling could keep the bears on top for some more time,” said Chandan Taparia, derivatives analyst at Motilal Oswal Financial Services.
OI indicates how many options contracts are currently outstanding or open in the market. When writing a put, the writer agrees to buy the underlying stock at the strike price if the contract is exercised.
The fall in the last three sessions has eaten away all the gains made on Friday. “The Nifty fell below Friday’s intra-day low of 8,556. Although the index is highly oversold on near-term basis, the oscillators on the higher timeframes display incremental pain. The next significant support falls around the historical support zone of 7,890-8,000,” said Arun Kumar, market strategist at Reliance Securities.
Source: BS Research Bureau; SMAVG: Simple moving average
India VIX, a measure of investors’ perception about the risk of sharp swings based on options prices, rose 1.6 per cent to 63.95 on Wednesday. The gauge has jumped 4.5 times since February 20. VIX is meant to indicate investors’ perception of the annual market volatility over the next 30 calendar days. The higher the value, the higher is the expected volatility, and vice versa. The CBOE Volatility Index (VIX), another popular fear gauge which measures the short-term volatility of S&P 500 indices, has shot up 40 per cent in the past five sessions to 75.91.
“Rather than looking at index levels, one should wait for the fear indicator to cool off. Till such time it doesn’t happen, the onslaught is likely to continue,” said Sameet Chavan, chief analyst – technical & derivatives, Angel Broking.
“Momentum traders should avoid going against the direction and should strictly avoid leveraged trades. Many would argue looking at the brutal fall in hindsight, going short was extremely easy in such market. But the bitter truth is it is not the way it appears. One should avoid aggressive bets in any directions and should follow strict stop losses when it comes to trading.”
The Supreme Court’s stance on AGR dues and the ensuing pressure on telecom and banking stocks have raised fresh concerns as well. “We reiterate our advice accumulating fundamentally sound counters in staggered manner rather trying to find the market bottom. Traders, on the other hand, should prefer options strategies instead of naked trades until the market stabilises,” said Ajit Mishra, VP - Research, Religare Broking.
Traders are now hoping that the market will find support at the 7,890 level, where the market had previously found support after the demonetisation of the Indian currency.
“The breach of 10,000 on Nifty last week has put the markets in uncomfortable territory giving a structural breakdown. We continue to expect volatile swings as India VIX remains elevated. An immediate reversal is unlikely but a bounce back from here is highly probable. Long-term investors can consider accumulating gradually,” said Sahaj Agrawal, head of research - derivatives, Kotak Securities.