Trade setup: Not the time not to take any directional bias for granted; cautious view advised

After opening with a gap-down and slipping further, Nifty made its low point of the day in the late afternoon trade. After that, some recovery followed which saw the index rebounding over 200-points from its low point. However, the markets found it difficult to sustain that and the recovery got sold into. In the end, the benchmark index ended with a sizable cut of 382.20 points (-2.35%).

Monday’s session can be called a technically damaging one. Despite a lot of shorts that continue to exist in the system, Monday’s loss has certainly bought the immediate resistance points even lower for Nifty. Now, whenever a technical pullback occurs, it is bound to face very stiff resistance at the 16,000-16,200 zone as this is the important pattern support area that Nifty has violated.

For Tuesday and the rest of the week, Monday’s low point of 15,711 will be crucial to watch. If Nifty has to avoid further weakness, it will have to keep its head above 15,700 levels. Volatility increased as IndiaVIX moved higher by 4.90% to 29.3300.

Tuesday is likely to see the levels of 15,900 and 16,090 acting as probable resistance points. The supports are likely to come in at 15,760 and 15,680 levels.

The Relative Strength Index (RSI) on the daily chart is 30.47; it shows a strong bullish divergence against the price. While the price made a sharply lower low, the RSI did not and this resulted in a strong bullish divergence. The daily MACD is bearish and below the signal line.

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A falling window emerged on the candles. While this results out of a gap on the downside, it usually resolves in the direction of the trend. However, this will need confirmation. It would be wise not to take the reading for granted as this is caused by an external factor and the markets remain nearly oversold.

In any case, confirmation is a must for such formations.

All in all, it is important not only to note but also to accept that since the markets are getting affected sentimentally because of external factors, they tend to defy technical levels. In such circumstances, the best way to navigate such markets is not to take any directional bias for granted. It may so happen that despite a strong gap on the downside, we may see an equally strong technical pullback given the kind of shorts that exist in the system.

We recommend continuing to stay away from creating aggressive positions. All downsides should be used to picking up good quality beaten-down stocks. A continued 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 [email protected])