We have had a dramatic February, so far.
Having started the month with the Nifty opening briefly below the 200-day simple moving average (SMA), the index had a stellar few days thereafter, giving hopes of a new peak, only to lose way by mid-month and systematically edge lower.
And here we are, staring again at the 200-day SMA near which it has closed again. It is quite unusual for such repeated tests of the 200-day SMA within just one month, as this moving average is followed by a large number of investors as a marker below which the bear trend begins.
But then, it is also not usual for the key moving average to be within 6 percent vicinity or so, of the record peak for such an extended period. So, in a way, this can be seen as a price action attempting to set the averages right.
How significant is 200-day SMA retest?
Very because we are immediately going to see at least a 6 percent move or more in the Nifty from current prices, simply because that is what the index has done every time it has approached this key level. Now the question is the direction. Will it bounce off or scythe through?
After holding for the most of the day, the 200-day SMA gave way on February 26, albeit briefly, in the closing hour. However, the 57 points bounce off the same, testing the 38 percent fibo of the day, helped it close near the key average again, suggesting that neither the bulls nor the bears are low on confidence.
There are a few points that could help pick a side on February 27. First is that 74 percent of the Nifty stocks closed at least 0.5 percent above the day's lows, clearly pointing to the fact that it has not been a carnage. Secondly, 70 percent of the stocks closed below the day's midpoint, making stocks attractive for bargain hunters the next day. These numbers turned out to be similar for the larger universe as well in NSE, hinting that the bias is tilted on the positive side.
FIIs hold the cards
Even as options spectrum has been decidedly bearish lately, FIIs' addition to index future longs by around 40 percent each on February 24 and the next day, along with some long-call addition, hints at a directional bet taken by the FIIs on the upside, even while other segments were being unwound ahead of February derivatives' expiry.
The disparity in implied volatility (IVs) between February and March weekly expiries is higher on the Put side, hinting at limited expansion possibility on February 27 for Puts. This also adds to upside hopes. If March weekly accumulation is any indication, then 12,000 to 11,500 are the breakout points on either side.
(The author is Chief Market Strategist at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.