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  • Milan Vaishnav, CMT, MSTA

Thursday Trade Setup: Some Volatile Consolidation Likely; Avoid Chasing Pullbacks, If Any

Despite a robust overnight closing of the US markets after volatile trade, the Asian markets in general and India in particular completely failed to capitalize on the positive set up. The Indian equities saw a modestly negative start to the day, but the markets did not take any directional bias throughout the day. The headline index NIFTY saw itself swinging 100 points on either side without establishing any directional bias. It was off its intraday low but in the same breath also failed to sustain at its high. In the end, while heading nowhere, the NIFTY ended flat with a negligible gain of 6.95 points (+0.07%).

The global markets are exhibiting a tentative bias as well. The Indian Volatility Index, INDIAVIX, rose another 2.45% to 31.5550 despite coming off its highs. The NIFTY futures have added another 13.17 lakh shares or 7.64% in Open Interest, indicating the continuation of a massive built up of short positions. The immediate low point of 10300-10334 is a very crucial point to watch in the near term. From this zone to 10650, the markets may witness some volatile consolidation going ahead from here.

A shaky start to the trade cannot be ruled out on Thursday with the levels of 10500 and 10565 acting as overhead resistance. The supports will come in at 10390 and 10330 levels.

The Relative Strength Index (RSI) on the daily chart is 19.48; it continues to trade deeply oversold without showing any divergence against the price. The daily MACD is bearish and stays below its signal line. No significant formations were seen on the candles.

The pattern analysis shows that the NIFTY not only breached the lower support of the broadening formation that it was trading in, it also went on to slip deep below the crucial moving averages, and all significant pattern supports. The defiance of the technical levels was due to the global meltdown. The global risk-off was triggered by the outbreak of Coronavirus and its likely effect on throwing economies into a recession.

We also have an expiry of the weekly options coming up on Thursday. The strikes of 10500, 10600, and 10700 have significant incremental built up of Call Open Interest, with each of these strikes acting as resistance. The absence of Put OI built up is relatively lower, indicating more expectations of a move on the downside.

The deeply oversold nature of the markets on the short-term charts and high built-up of short positions in the systems are the only two factors that can trigger a short-covering fueled technical pullback. Apart from this, the broader sentiment remains outrightly bearish. In the event of any technical pullback, we would strongly suggest not chasing the up move and continue to approach the markets with a highly cautious and a selective approach.

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