Monday Trade Setup: NIFTY Oversold; Avoid New Directional Positions Until Signs Of Stability Emerge
The Indian equity markets succumbed to severe global weakness as it opened with a gap down and ended with a much larger cut. The weakness in the domestic markets was very much in line with global peers like the US, European, and Asian markets saw across the board selling in the equities. After opening on a negative note, the NIFTY saw no inclination to recover, and even the smallest of the recovery was sold into. In what remained one of the worst selloffs of the recent past, the headline index ended with a massive cut of 431.55 points (-3.71%).
Monday is likely to see a volatile start to the day. There are mild chances of the markets attempting to stabilize as the US markets on Friday have come off considerably from their intraday lows. The volatility index, INDIAVIX, which rose by 30.79% to 23.2350 on Friday, is likely to start getting cooled off as well. However, it will be some time before the Markets establish a firm bottom for themselves.
Given the nature of the global panic reaction, it is obvious that the technical levels will get defied, and we will see the markets disrespecting important technical setups. However, in the event of any pullback, the levels of 11250 and 11295 will act as resistance points on the higher side.
The Relative Strength Index (RSI) on the daily chart is 24.44; it has marked a fresh 14-period low, which is bearish. The RSI does not show any divergence against the price and presently trades in the oversold territory. The daily MACD is bearish and trades above its signal line. A falling window occurred on the candles. Such a formation results out of a gap and usually implies the continuation of the downtrend.
The pattern analysis shows that not only the markets have broken down from a broadening formation, it has also moved below all its moving averages as well. Presently, it appears to have been showing signs of some exhaustion in the selling pressure, but any overnight negative newsflow can make the situation worse despite the current technical setup.
All in all, as the current selloff is in part of the global panic reaction to the Coronavirus becoming a pandemic, we would specifically like to point out that any attempt to create fresh shorts at the present levels would be highly risky. The NIFTY has given up over 1200 points from the highest levels and also trades in the oversold territory.
It is very much possible that as a part of global risk-off, the markets may continue to remain weak and stay oversold for some time. It is also possible that attempting to mark at a bottom in the present setup is equivalent to catching a falling knife. However, taking a broader look at the technical suggests that even if a mild attempt to find a bottom is made, it can result in a severe short-trap. We recommend staying away from creating any fresh positions and wait until some signs of stability emerge from the markets. A highly cautious view is advised for the day.
Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)