Trade setup: Market defying technical signals, avoid significant exposures

After enjoying a relatively strong start to the day, the domestic equity market wiped out all the gains by afternoon to trade near its previous close. As if that was not enough, the market was gripped by severe bearish sentiment that followed post negative news flow, which took the market further down.

The headline index slipped below the crucial 200-DMA and went on to close below it after losing 103 points, or 0.93 per cent.

The market has been defying technicals over the past couple of sessions. A technical pullback was expected based on some prominent signs that are present on the charts. Such signs include the formation of an Engulfing Bearish Candle near the crucial supports on higher volumes, the lead indicators remaining oversold and Bollinger Bands getting much wider than usual.


However, there are times when such favourable reversal setups often get overwhelmed by short-term bearish sentiments that get exerted beyond reasonable measures. In such times, the market may remain weak despite being oversold and continue to show signs of pullback. Amid such setups, it is usually prudent to stay away from taking significant exposures and wait until the market comes within the technical parameters.

In line with this, Wednesday’s session may see a tepid start to trade. Even with all the signals that point towards probable technical pullback, we may see weakness persist in the market. The 11,140 and 11,250 levels will act as resistance while 11,050 and 10,950 levels will act as supports.

The RSI on the daily chart stood at 26.6290. Though it has marked a fresh 14-period low, it now trades distinctly in the oversold zone. The daily MACD remains bearish and continues to trade below the signal line.

The 200-DMA for Nifty now stands at 11,143. It would be of critical importance for the index to crawl back above the 200-DMA as early as it can to avoid the weakness from getting deeper. Nifty also remains oversold on daily Stochastic. It is best advised to refrain from any significant exposure and wait until stability returns to the market.

Creating fresh shorts will not be a good idea give the current oversold structure of the market. A highly cautious view is advised for the day.

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