Friday Trade Setup: Technical Pullback Looks Imminent; Avoid Shorts As Downsides Look Limited
The rollovers entirely dominated the trading landscape on Thursday as the NIFTY saw measured movements and continued to end in the negative territory for the sixth consecutive day. The markets saw a buoyant start to the trade, and at one point it looked as if a healthy technical pullback is on its way. However, the markets pared all of its gains by afternoon and slipped in the negative. In a range-bound trade after that, the NIFTY ended the day with a net loss of 19.15 points (-0.17%).
A robust technical pullback is now overdue in the present short term technical setup. On the expiry day, the shifting of maximum PUT OI from 11300 to 11200 pushed the NIFTY below the 11300 levels. Similarly, the shifting of maximum Call OI to 11300 did not allow the NIFTY to go beyond this level. However, with expiry now behind us, a technical pullback cannot be ruled out in the immediate short-term.
A flat to mildly positive start can be expected again on Friday. The levels of 11300 and 11385 will act as immediate resistance while supports will come in at 11200 followed by the 200-DMA, which is presently at 11132.
The Relative Strength Index (RSI) on the daily chart is 30.76; this makes the markets almost oversold. The RSI has marked a fresh 14-period low, which is bearish, but it does not show any divergence against the price. The RSI also appears to be taking support on a downward sloping trend line. The daily MACD continues to remain bearish and trades below its signal line. A candle with a long upper shadow occurred. The emergence of such a candle would have been bearish had it happened after an up move. However, in the present structure, it has no relevance.
The pattern analysis of the daily charts clearly shows the downtrend extending itself after the NIFTY breached its 100-DMA on the downside. Though the markets appear generally oversold, the next crucial support for the NIFTY is at 200-DMA which currently stands at 11132.
Given that the technical pullback is imminent and overdue, it may take a day actually to happen. Even if the pullback gets delayed, we strongly recommend avoiding creating fresh shorts. It is just a matter of time that the NIFTY will attempt a technical pullback, and this may lead to a short trap. We suggest using new down moves in the event of the markets continuing to remain soft; they may be used to make selective purchases. While altogether avoiding shorts, profit should be vigilantly protected at higher levels. While adopting a cautious view, heavy positions should be avoided.
Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)