Trade setup: Nifty oversold; but don’t try to catch a falling knife

The domestic equity market succumbed to severe global selloff on Friday, as it opened gap down and ended with a much bigger cut. After opening on a negative note, NSE Nifty made no attempt to recover, and even small rebounds were sold into. The headline index finally settled with a loss of 431.55 points or 3.71 per cent at 11,201.75.

Monday’s session is likely to see a volatile start, as there are mild chances of Dalal Street attempting to stabilise with the US markets on Friday coming off considerably from their intraday lows.

The volatility index, India VIX, which spiked 30.79 per cent to 23.24 on Friday, is likely cool off as well. However, it will be some time before the market establishes a firm bottom.


Given the nature of panic reaction in the global markets, it is obvious that key levels will get defied, and we will see the market not respecting important technical setups. However, in the event of a pullback, the 11,250 and 11,295 levels will act as resistance.

The Relative Strength Index (RSI) on the daily chart was at 24.44 and marked a fresh 14-period low, which is bearish. The indicator did not show any divergence against the price, and traded in the oversold territory.

The daily MACD was bearish and traded above its signal line. A falling window pattern was formed on the charts. This formation is formed out of a gap and usually implies the continuation of a downtrend.

As pattern analysis, the market has not only broken down from a broadening formation, it has also moved below all its moving averages. At present, the index is showing signs of some exhaustion in the selling pressure, but any overnight negative newsflow can make the situation worse despite the current technical setup.

All in all, as the current selloff is in part of the global reaction to coronavirus pandemic fears, we would point out that any attempt to create fresh shorts at the present levels would be highly risky. Nifty has given up over 1,200 points from its highest level and trades in the oversold territory.

It is very much possible that as part of global risk-off trade, the market may continue to remain weak and stay oversold for some time. Attempting to mark a bottom in the present setup is equivalent to catching a falling knife. However, taking a broader look at technical setup, even if a mild attempt to find a bottom is made, it can result in a severe short-trap.

We would recommend traders to stay away from creating fresh positions and wait until signs of stability emerge. A highly cautious view 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)