market outlook: Trade setup: Nifty likely to witness more weakness; remain extremely cautious

Despite a much stronger and better-than-expected start to the day, the Indian equities on Tuesday failed to capitalize and built on the gains and ended up closing in the red. The markets saw a strong start. The Nifty tested the 14,500 level in the early morning trade. However, it transformed itself in a falling trajectory and eventually pared all its opening gains to slip in the negative territory.

Not only this, the index also got weaker as the went very near to the 14200-level, paring nearly 300 points from its high point of the day. Eventually, following some modest recovery from the lows, the headline index ended with a net loss of 63.05 points, down 0.44 per cent.

The markets are hanging in a precarious manner as of the previous day’s close. The Indian markets will open after a gap of one trading holiday. Despite stable global structure, the Nifty is likely to see weakness owing to domestic Covid situation.

There are two things that the index will have to grapple with. First, we have weekly options expiry coming up. The maximum Put Option Interest concentration is at 14,000 levels, which is quite a distance from the current close. Second, the Nifty has slipped below the 100-DMA, which is 14,346. Crawling back above this level on a closing basis is extremely crucial for the markets to avoid weakness. However, given the likely gap-down opening on Thursday, this level will be meaningfully breached.

Thursday is likely to see the markets opening on a weaker note. The levels of 14,350 and 14,430 will act as resistance, while supports are likely to come in at 14,180 and 14,000 levels. In the event of any intensified corrective move, the trading range is likely to remain wider than usual.

The RSI on the daily chart is 41.22. It continues staying neutral as it does not show any divergence against the price. The daily MACD is bearish and remains below its signal line. A large black candle emerged, which shows directional consensus of the market participants.

Broadly speaking, the trajectory of the markets can be either way despite a near-certain possibility of a gap-down opening. If the opening is weaker-than-expected, we will see the Nifty opening near to the 14,000-mark. Given the fact that this holds maximum Put OI, any incremental downsides may be less, and some rebound can be seen. On the other hand, if the opening is not-so-near the 14,000 levels, we will see the markets oscillating with some more amount of volatility ingrained in it.

We recommend staying away from creating any leveraged positions. The gap down, if at all that happens, should not be immediately used to make a purchase. Also on similar lines, weakness should not be used to create incremental shorts. It is important to note that the Nifty is still inside the falling channel and may test the lower edge of this channel. We recommend staying extremely light on the positions and continue approaching the markets on a highly cautious note.

Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia