Trade Setup: Nifty50 oversold; rebound from current levels extremely crucial

In a disastrously weak session on Monday, the Indian equity markets put up a gross underperformance against the global markets and ended the day with a deep cut. After Nifty50's gap-down start, the markets showed no intention of recovery. The selling pressure got overwhelming and Nifty50 went on to violate the key support levels rapidly. The headline index touched the striking distance of just 100-odd points from the 200-DMA level. However, some respite was seen in the second half of the day as the index saw a recovery of 200+ points from the low point of the day. Despite this recovery, the benchmark index ended with a deep cut of 371 points (-2.18 per cent).

The market breadth was extremely negative; only 3 out of 50 Nifty50 stocks ended in the green. Also, the selling was so heavy given the FII outflows that it was evident in the F&O data as well. Nifty50's current month futures saw net open interest fall by 6.21 lakh shares or 5.69 per cent. This reflects long unwinding as the shedding of OI has come with the decline. However, it also needs to be seen that the lead indicators show a very strong bullish divergence; there are all probabilities that Monday’s low of 16410 may have become a potential base for the markets. It would be interesting to see if fresh buying comes in at current levels.

Volatility spiked intraday; on a closing basis India VIX rose 16.08 per cent to 18.9650. Markets may see a shaky start to the day on Tuesday; the levels of 16690 and 16765 may well act as potential resistance levels. The low point 16410 will be the most crucial support level to watch for, not just for Tuesday but for the coming days as well.

The Relative Strength Index (RSI) on the daily chart is at 32.22; it shows a very strong bullish divergence against the price. The price is marking sharply lower lows, but RSI is not doing so. This has resulted in a strong bullish divergence against the price. The MACD has shown a negative crossover; it is now bearish and below the signal line.

All things considered, the approach to the markets is pretty simple. On a short-term basis, the selling is overdone; this is reflected in the way Nifty50 rebounded from 16410 levels. There are greater chances of this low point being held as a hard and potential low for the immediate short-term. To interpret this in other words, if the markets still do not rebound which is now overdue, it would be best to stay away from the markets rather than adding shorts. Adding shorts will have a very adverse risk-reward ratio and that should be best avoided. A highly cautious view is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)