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  • Milan Vaishnav, CMT, MSTA

Wednesday Trade Setup: NIFTY Stares At This Level For Support; Avoid Chasing Technical Pullbacks

The session on Tuesday turned out precisely on the expected lines. In the previous note, we had advised against chasing the pullbacks, if any. In line with the analysis, the NIFTY did enjoy a smart pullback in the first half of the session after a tepid start to the day. However, the markets failed to sustain the up move, and the NIFTY came off nearly 500-points from the high point of the day. The headline index slipped below the psychological mark of 9000 levels and ended the day with a net loss of 230.35 points (-2.50%).

The India Volatility Index, INDIA VIX, surged by another 6.88% to close at 62.9250. The NIFTY is expected to consolidate in a broad range, with the levels of 8550 acting as a base. The reason for technical pullbacks not sustaining is that the equities the world over are grappling with sharply declining Relative Strength against other asset classes like Debt, Treasuries, Corporate Bonds, and other safe-haven assets like Gold. If such preference towards asset allocation is observed globally, usually, the consolidation after sharp decline tends to act as a continuation pattern.

The markets again face a tentative start to the day on Wednesday. The levels of 9150 and 9310 will act as resistance points. The supports will come in at 8805 and 8605 levels. Just like the previous sessions, the trading range is expected to be wider-than-usual over the coming days.

The Relative Strength Index (RSI) on the daily chart is 17.57; it continues to remain in the oversold territory. The RSI also shows a bullish divergence as it has not marked a fresh 14-period low on lines with the NIFTY. The daily MACD remains deeply bearish while trading below its signal line.

The pattern analysis shows that after testing the low near 8550, the index has not yet violated that level and might consolidate with a base near that point. The rest of the short-term indicators stand deeply oversold, but they have little relevance amid the global weakness.

When a trend is powerful, overbought markets tend to stay overbought and continue inching higher. In the same way, amid the weakest of the setups, oversold markets tend to remain oversold for some time and keep moving lower. Just that a market is overbought is not a reason to sell, similarly, just that a market is oversold is not a reason enough to buy.

Technical pullbacks when the markets are oversold cannot be ruled out. However, as and when they occur, their sustainability is a matter of great concern. The Indian markets, too, can see intermittent technical rebounds, but we recommend buying only when an area formation is seen, and some mild signs of bottoming out appear. The global texture will continue to affect our markets as well. We recommend continuing to adopt a highly stock-specific view and approach the markets with a considerable amount of caution.

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