Cover short positions, a break above 24,890 needed to confirm bullish reversal: Vinay Rajani

Vinay Rajani, AVP, Senior Technical & Derivative Analyst, HDFC Securities, says following a significant 1,000-point decline, the index has now arrived at a support zone, with derivative data indicating an oversold condition. Rajani suggests covering short positions and awaiting market stabilization. While the overall positional trend remains weak due to the existing lower tops and bottoms formation, a break above 24,890 is needed to confirm a bullish reversal.

Let’s talk about the texture of the market, currently important support levels and even the resistance that the market is facing – Nifty and Bank Nifty to start with?
Vinay Rajani: Nifty has already witnessed more than 1,000 points fall from the recent swing high of 25,670 and now Nifty has reached the crucial support band around 24,500 to 24,600. So, there is a 100 days EMA, today's low which is around 24,598, also happens to be the 100-day exponential moving average for the Nifty. So, that is also a crucial support and as we all know, in the month of June also, there was a huge consolidation and long consolidation was there and the base which was there in the month of June for Nifty was around there and the base in June for Nifty was around 24,500. So, the 24,500-24,600 zone is a very crucial one.

As we all know that the long to short ratio by FIIs in index futures has also been in the oversold territory. Yesterday's ratio was 0.17. They have been carrying short positions for a long time and this is an oversold number and anytime soon we can see the covering of their shorts by the FIIs in the index future. So, after a 1,000 points fall, now the index has reached the support zone and derivative data is also suggesting some oversold scenario.


This is the time to cover your shorts and wait for some stable market. However, the positional trend of the market will remain weak because as we all know the lower tops, lower bottom formation is still intact, and the previous swing low was 24,890 odd. We are waiting for that to be taken out on the upside to confirm the bullish reversal. But yes, if not going long, but at least short should be covered at this point of time because the Nifty has reached the strong support and we cannot rule out the possibility of the bounce-back from this level.

You are saying that we are near support levels. Sector-wise, a few of the sectors have underperformed, and in the past one week, it has been the IT sector. What is your view? What are the charts suggesting of the stocks there?
Vinay Rajani: Since the largecap IT underperformance in July itself, the Nifty IT index is down by 10% because of the performance of TCS, HCL Tech and Infosys. For the last four consecutive weeks, the IT index has been falling from the high of 39,500. The Nifty IT index has come down to 35,100. So yes, going by history, July has been the best month for the IT index. But this is a reverse case in 10 years where we have seen a significant underperformance by the IT index.

But now, after falling for the last five consecutive weeks from healthy corrections, it has reached an oversold territory. The risk-reward ratio is not favourable for going short here. We are waiting for some stability to come. If consolidation is there or if price stops falling from here, then we have a hope of a bounce back in the index because a healthy fall of 10% in July is quite significant and whatever negatives were to come from the results, has already been discounted in the prices. Till now, the trend has been negative. It is still negative, but we are waiting and we are expecting that anytime soon a bounce would come. Whether it will sustain or not, we will decide later on, but the trend is weak but at this point of time, going short risk-reward is not favourable.

We are in the middle of the earnings season. Right now, Varun Beverages has posted the numbers. On the profit front, it did see a 5% upsurge on a year-on-year basis. However, the revenues have gone down. Want to understand your trading ideas and if you have a view on Varun Beverages.
Vinay Rajani: Because of the result on Tuesday, the stock has recovered from the lower level and if I were to purely go by the technical charts, this pattern is known as a flag pattern breakout. If the stock closes here, then it will confirm the pattern. After some running correction, the stock has resumed the uptrend and is now up by 1.5% and the stock has also surpassed the 50 days' exponential moving average resistance last week.

The setup is quite good, recovering from the lower levels and gradually getting strength. Tuesday's low of 478 becomes the strong support for the counter and should be kept as a trading stop loss in the counter. Looking at the chart, it looks like that it should extend the rise from here and in trading, one should have a stop loss of 478.

Did you give your stock specific recommendation?
Vinay Rajani: Basically, we are bullish on the chemical and agrochemical space and as the results have been coming out very positive, the resilience in these agrochem and chemical stocks has been very good. Rallis India is one of the stocks which we like, results were quite convincing, and the technical setup is quite convincing. Rallis India can be bought at around 378, 379. 370 should be the trailing stop loss and 395 should be the near-term target.

The second pick would be from the metal space. On Tuesday, metal resumed an uptrend and is likely to do well in the coming session also. JSW Steel is looking good on the chart. So, 1045 around level one can go long. I would suggest a trailing stop loss at 1030. On the upside, I am expecting a target at 1070.