Trade setup: Nifty50 may look to stabilise; outlook is still bearish
The relative strength index on the daily charts stood at the 36.04 level and remained neutral.
The weakness was a result of deteriorating technical setup. The onset of which had started on Friday, as Nifty halted its technical pullback after testing its 200-DMA at 11,170. The headline index displayed some retracement after testing the 200-DMA, and intensified its fall while adjusting to the global trade and the negative global setup.
On the other hand, Nifty trades above its immediate low point of 10,782, and therefore there are chances of the index oscillating between 10,782 and 11,170 levels. A stable start is likely on Wednesday, but it would be necessary for the index to stay above the 10,800-10,850 zone to avoid weakness.
Wednesday’s session is likely to see 10,975 and 11,030 levels act as resistance while supports may come in at 10,880 and 10,820.
The RSI on the daily charts stood at the 36.04 level and remained neutral, showing no divergence against the price. The daily MACD stayed bearish and traded below its signal line.
An engulfing bearish line formed on the candles (where a black candle's real body completely contains the previous white candle's real body). If the engulfing bearish pattern occurs during a downtrend -- which appears to be the case with Nifty -- it may be a last engulfing bottom, which indicates a bullish reversal. This will require confirmation on the next trading day.
In the same breath, this large black candle has solidly reinforced 200-DMA as critical resistance for the market over the coming days.
With Thursday a trading holiday, we will see weekly options expiry happening on Wednesday, and this will dominate the trade as well. The options data show maximum Call open interest at 11,100 and 11,200 strikes, but on the lower side show support at 10,900.
We advise traders to avoid shorts and keep making modest purchases at lower levels. Aggressive positions on either side should be avoided while maintaining a cautious view on the markets.
(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at firstname.lastname@example.org)