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  • Milan Vaishnav, CMT, MSTA

Monday Trade Setup: Large Shorts May Lead To Short-Covering From Lower Levels; Stay Stock-Specific

The overnight weakness in the global markets took its toll on Indian equities on Friday and inflicted a gap down opening in the trade. Just like the Asian peers, the Indian equity markets opened with a massive gap down and slid further in the morning trade. After spending two hours on a fragile note, the headline index NIFTY index attempted to recover from the low point of the day. Although the recovery wasn’t enough to wipe out the losses given its extent, the index managed to recover around 160-odd points from the lows. Despite the quantum of this recovery, the NIFTY ended with a net loss of 249.55 points (-2.48%).

The India Volatility Index – INDIAVIX, too, rose by 10.30% by 25.6425. The markets have also slipped in the oversold territory once again. Along with this, Friday’s session has seen a large amount of shorts getting added to the system. Some amount of downsides may continue to persist, but there are higher chances of some technical rebound being attempted by the markets. Tuesday is a trading holiday on account of Holi.

There are possibilities of a shaky start to the trade on Monday. The levels of 11030 and 11085 will act as resistance. The supports will come in at 11960 and 11890 levels.

The Relative Strength Index (RSI) on the daily chart is 26.08; it has slipped in the oversold zone below 30. The RSI has shown a bullish divergence as while the NIFTY marked a fresh 14-period low; the RSI did not. The daily MACD is bearish as it trades below its signal line.

A falling window occurred on the Candles. Such a formation is created by a gap on the downside and usually translates into a continued downtrend. However, in the present technical setup, the oversold nature and the shorts in the system may keep the downsides limited, at least for the time being.

All in all, the large extent of the short positions in the system makes a case for one more attempt for short-covering in the markets. In the event of any initial weakness, if any, there are larger possibilities that bout of short-covering may follow. It will be crucial for the markets to protect Friday’s low of 10827 over the coming days. So long as the markets can defend this level, it is likely to see some technical rebound and consolidate. We recommend refraining from creating fresh shorts and continue staying highly stock-specific in approaching the markets as markets may turn cautious towards the end, given the trading holiday on Tuesday.

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