Nifty: Trade Setup: Minor technical pullback, short covering bounce possible in Nifty

The domestic equity market finally saw a corrective move, as it spent the entire day in a downward trajectory to end with a sizeable cut. The market opened on a resilient note and resisted weakness in the early minutes of the session. However, selling pressure crept in and Nifty found itself in a declining channel.

The index remained in a falling trajectory throughout the day, as it kept losing ground and at one point, Nifty came off over 200 points from its high point.

Nifty did not show any major recovery, and ended the session with a net loss of 151 points, or 0.96 per cent. The expiry of the weekly options played out on the expected lines.

Maximum Call Open Interest shifted lower to 15,800 level from the 16,000 mark. This caused the index to slip below this point. Highest PUT OI shifted lower to 15,700 level. This helped Nifty settle above this point. Volatility spiked on the expected lines; and INDIA VIX rose by 11.03% to 13.5600 level.

Thursday’s price action marked 15,900 level as an intermediate top for the market. Every rise, if any, will not face serious resistance at every higher level, including the 15,900 mark.

Nifty is likely to face resistance at 15,780 and 15,825 levels on Friday, while supports should come in at 15,680 and 15,590 levels.

The Relative Strength Index (RSI) on the daily chart stood at 53.32. It marked a fresh 14-period low, which is a bearish sign. The RSI also showed a negative divergence. While the RSI marked a new 14-period low, the price has not done so, and this resulted in the bearish divergence. The RSI has made this low ahead of the price. The daily MACD remains bearish and stays below the Signal Line.

A large black body emerged on the candles. The occurrence of a large bearish candle exactly near the resistance point of 15,900 reinforces the credibility of this level as a strong area of resistance.

The market breadth remained particularly weak. As many as 43 out of 50 stocks declined in the Nifty pack. This phenomenon is likely to persist for some time. Weak market breadth and declining internal strength will remain core technical issues that the market will have to deal with over the coming days.

All in all, as we approach the end of the week, a minor technical pullback cannot be ruled out. Also, some short covering-led bounce can be expected in the high-beta stocks, which faced heavy selling in Thursday’s session. We recommend staying away from such bounces, if at all they occur. While staying put with purchases in defensive stocks, we recommend adopting a highly cautious outlook on the market.

(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)