Nifty: Trade Setup: Nifty50 in oversold territory; further downsides may be capped

Indian equities declined for the fifth day in a row; this time, the Indian markets remained one of the worst performers compared to their peers. Nifty50 defined a stable trade setup as it opened on Monday. The headline index opened on a modestly positive note but marked the intraday high point in the early minutes of the trade, after which, it soon slipped into the negative territory. Throughout the day, Nifty50 stayed under strong corrective pressure as it went on to slip even below the 18300-level. The last hour did see some recovery, but even after recovering close to 136 points from the low, the benchmark index ended with a net loss of 348.25 points (-1.96 per cent).

Over the past five sessions, Nifty50 has declined by nearly 700 points, even after the recovery of 136 points from Monday’s low point. Although the options data do not throw a clear picture, Nifty50 PCR across all expiries has now slipped below the 0.70 mark; it is now at 0.67 which shows it is deeply oversold. The major worry factor for the markets is the lack of buying and the absence of shorts in the quantum required to support the markets at lower levels. However, Nifty50 is now overdue for a technical pullback despite the structure staying bearish in the near term. India VIX surged 17.92 per cent to 17.5200, as the market volatility spiked.

Tuesday will see the levels of 17500 and 17590 acting as resistance points for Nifty50. The supports come in at 17350 and 17250 levels.

The Relative Strength Index is at 35.60; it has marked a fresh 14-period low which is bearish. It is neutral and does not show any divergence against the price. The daily MACD is bearish and does not show any divergence against the price. Nifty50 formed a large black-bodied candle on the daily chart; this reflects the strong bearish directional consensus of the market participants.

The pattern analysis shows that the markets have finally broken down from the bearish head and shoulders formation; it has also slipped below the 50-DMA which now stands at 17851.

Overall, the present head and shoulders formation is not a fractal one; meaning, it has been formed over a relatively short time and it is not visible on the higher timeframe charts. So, there might be bearish implications of this, but at the same time, there are higher chances that the markets may not suffer much from this and may see a technical pullback. Given the oversold nature of the derivative data, it is recommended that creating fresh shorts should be avoided. Any profits that exist on the short side should be protected as some technical bounce is imminent and overdue. We recommend using the downsides to make select purchases. While staying light on overall positions, a highly cautious view is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)