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  • Milan Vaishnav, CMT, MSTA

Friday Trade Setup: Short Covering Led Pullbacks Can Be Deceptive; Avoid Any Major Directional Call

In a day that was marked with high volatility and wide trading range, the Indian equities fluctuated on both sides and finally ended in the negative for the fourth day in a row. The markets witnessed a sharply lower opening amid weak global setup. After opening with a gap down, the NIFTY attempted to recover its losses. By late afternoon, the NIFTY rebounded over 600-points from its low point. However, by close, the index did come off its loss and ended with a net loss of 205.35 points (-2.42%).

Thursday’s rebound was fueled by massive short-covering led rally. Also, the weekly options expiry, too, played the dominant role in the trade. The volatility saw a fresh surge as India Vix spiked 12.89% to 72.1975, and it now trades near its lifetime high levels. Short-covering led rallies can remain deceptive. Even if the markets pull back some more, it would be crucial to see if there is some buying from lower levels.

Friday is likely to see a quiet start to the trade. However, the upsides are expected to remain limited even if there is a technical pullback. The levels of 8350 and 8575 will act as strong resistance points; supports will come in at 8010 and 7800 levels.

The Relative Strength Index (RSI) on the daily chart is 14.28; it stays neutral and does not show any divergence against the price. The RSI remains in oversold territory. The daily MACD remains deeply bearish as it trades far below its signal line.

The pattern analysis shows that the NIFTY has continued its unabated downside despite staying in oversold territory. Just like strong trending bull markets continue to remain overbought for some time, the markets with a strong downtrend continues to stay oversold.

The analysis for Friday continues to remain on similar lines. The markets are on its course for one of the biggest weekly loss if no meaningful technical pullback occurs. Also, the Indian equities will continue to remain uniformly affected by the global trade setup, which continues to remain very fragile. We strongly recommend staying away from making any large purchases and wait until some consolidation occurs, which may point towards some stability in the markets. Until this happens, it would be best to avoid placing any major directional bets in the markets.

Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)