Trade setup: Nifty50 likely to see positive start, but prone to selloff

In a classic demonstration of total lack of strength at higher levels, the domestic equity market again failed to capitalise on the gap-up opening it had on Tuesday. We had mentioned in the previous note that although a technical pullback is likely, sustenance of the same may be under a cloud as the technical setup remains weak.

Nifty opened higher on the anticipated lines, but gradually pared nearly all the gains by the end of the session. After coming off over 170 points from the high point of the day, the headline index ended with a modest gain of 55.85 points, or 0.63 per cent.

Banking and financial stocks remained particularly weak. Volatility Index, INDIAVIX, came off 3.57% to 39.4525. Nifty has formed an Inside Bar, which has resulted in the formation of a lower top, but a higher bottom. Going ahead from here, the market will continue to see intermittent technical pullbacks and remain vulnerable to selloff at higher levels.


The 50-DMA level will remain a major overhead resistance in the coming days. Wednesday’s session is again likely to see a stable start. The 8,930 and 8,990 levels will act as key resistance points, while supports will come in at 8,795 and 8,715 levels.

The Relative Strength Index or RSI on the daily chart stood at 45.65. It remains neutral and does not show any divergence against price. The daily MACD remains bearish. It trades below its signal line. Apart from a black body that emerged, no other significant formations were observed on the candles.

Going by pattern analysis, Nifty has a predominantly bearish technical setup. The structure has turned structurally bearish after Nifty fell out of the Rising Wedge formation. After falling out of the wedge, the index had consolidated for a short while. After that, it appears to have resumed the down move.

Following the moves over the past couple of days, Nifty has shifted its major resistance point lower to the 50-DMA at 9,199, and this will pose stiff hurdle in case of any technical pullback, if at all it occurs in the coming days.

In other words, the market is likely to remain vulnerable to selling pressures from higher levels. We advise traders to remain vigilant in the event of any technical pullback and keep protecting profits at higher levels while avoiding excessive exposures at current levels.

(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)