Trade Setup: 14,265 level crucial for Nifty; approach market with defensive mindset

A sharp surge in Covid cases and fears of lockdown in parts of the country, Maharashtra in particular, dealt a serious blow to the sentiment as headline equity index Nifty ended the day with a deep cup.

Despite a buoyant global setup, the Indian market had a very bad opening. Nifty opened on a gap-down note, it got weaker as the day progressed and showed no intention to pullback at any time during the day. The index, in the process, failed to move past few important levels on expected lines, but also ended up violating a couple of important levels in the process. In the end, the headline index ended with a net loss of 524.05 points or 3.53 per cent.

From a technical perspective, few observations are important at this juncture. First, despite the severe hit that the market took on Monday, it still remains very much within the falling channel and this channel has not been violated as yet. Secondly, the index has failed to move past its 50-DMA at 14,823, and this level will now act as a major resistance on a closing basis. Thirdly, the index has rested at its 100-DMA at 14,265. It would be extremely crucial to see if the index is able to defend this level on a closing basis.

Volatility spiked on expected lines as India VIX rose by 16.22 per cent to 22.9950. The index, given the steep fall in the previous session and with NIFTY PCR across all expiries at 0.89, can see some technical pullback. However, 14,500 level saw maximum call writing happening and this level also holds maximum Call OI on overall basis. So, all upsides will stay capped at this level.

The levels of 14,365 and 14,430 will act as important resistance points while support will come in at 14,250 and 14,180 levels.

The Relative Strength Index (RSI) on the daily chart stood at 40.35; it showed a mild bullish divergence against price. The daily MACD was bearish and remained below the Signal Line. A large falling window occurred. This results out of a gap down and normally has a bearish implication in the form of a continued downside. However, this will need confirmation on the next bar on the chart.

There might be some technical pullback given the steep decline in the market. Also, the index continues to remain in the falling channel; this channel is not violated as yet. However, the previous session has made the texture of the market bearish and has dragged the resistance points much lower. We reiterate continuing to approach the market with a defensive mindset, keep exposures moderate and adopt a highly cautious outlook for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)