Trade Setup: Nifty’s behaviour against 14,500 crucial; defensives to remain resilient

The domestic equity market found itself gripped in a risk-off setup, inherited from overnight weak closing in the US as well as the resultantly weak Asian markets.

Headline index Nifty opened on a negative note, got weaker as the day progressed and ended the day with a significant cut. After trading in a capped range in the initial hour of the session, the index slipped in a falling trajectory and remained so for the entire day. Nifty marked its low point towards the end of the session and showed no intention to recover from that point. The index finally closed with a net loss of 265.35 points or 1.70 per cent.

The session has been technically damaging on the charts. Nifty failed to move past its 50-DMA at 14,770, making this level a serious resistance for the market over the coming days. Also, it has slipped below the pattern support that existed in the form of an extended trend line near 14,700. This makes the zone of 14,700-14,770 a strong resistance area in the near term. Volatility spiked as India VIX rose sharply by 8.66 per cent to 22.4550.

We have weekly options expiry as well as monthly derivative expiry coming up on Thursday and this will keep the session influenced regardless of the overnight trade setup that we inherit. The max Call OI stood at 15,000 but the 14,700 strike saw maximum call OI being added today. On the lower side, 14,500 held the maximum Put OI. In the event of any continued weakness, Nifty’s behavior against 14,500 would be crucial to watch.

Thursday's session will see the levels of 14,620 and 14,700 acting as resistance points, while support will come in at 14,500 and 14,380 levels.

The Relative Strength Index (RSI) on the daily chart was neutral at 42.82 and did not show any divergence against price. The daily MACD was bearish and below its Signal Line.

Pattern analysis shows the failure of Nifty to penetrate its 50-DMA at 14,770. This point, along with the extended trend line which was at 14,700, will be a strong resistance zone for the index going ahead.

The defensive play was evident in the market today. We will see sectors like pharma, IT and a few select midcaps putting up a resilient show. We recommend traders to stay away from creating excessive leverage and continue adopting a highly cautious view 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)