Trade setup: Nifty may stage a technical pullback; avoid shorts

An all-out price war triggered by Saudi Arabia following Opec+’s disintegration gave a rude shock to crude oil prices. Crude witnessed its biggest ever sell-off after the 1991 Gulf War, with Brent crude declining over 25 per cent. The spread of coronavirus and its impact on global supply chain and economy, spooked equity markets across the world, leading to a meltdown on Monday. Indian equities were no exception as the market saw a gap-down opening and got weaker as the day progressed. Despite coming off 160 points from its lows, the headline index Nifty ended with a deep cut of 538 points.

The market has come off 2,000-odd points, or over 16 per cent, from the peak levels touched in January. The volatility index, India VIX, surged another 20.11 per cent to 30.80 and now trades at a multi-year high. The global mayhem will make the prediction of a likely bottom difficult for the domestic market as technicals tend to get defied. However, the market is expected to exhibit some signs of selling exhaustion, especially, given the amount of short positions that exist in the system.

Indian market will resume trading on Wednesday after a holiday on account of Holi. With the Asian markets ending modestly positive and European markets trading with gains until mid-Tuesday, it is likely that the domestic market will start on a positive note, provided there are no negative news in overnight trade. The 10,535 and 10,690 levels will act as resistance while supports will come in at 10,390 and 10,280.

The Relative Strength Index (RSI) on the daily chart marked a fresh 14-period low, which is a bearish sign. However, RSI is deeply oversold below the 30 level. The daily MACD stayed bearish and traded below its signal line. It would be prudent to avoid shorts as any kind of gap down opening does not provide good opportunities for creating fresh shorts. Further, given the extent of the downside that we have already witnessed, any new shorts may make the risk-reward setup extremely unfavourable. While avoiding shorts, we recommend using downsides, if any, to make highly stock-specific purchases. There are heightened chances of some technical rebound even if the broad setup remains bearish. A highly cautious and selective approach is advised 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)