Trade Setup: Wait for directional call to be clear before taking positions on Budget day

The domestic equity market failed to capitalize on a buoyant global setup on Friday as it could not sustain a strong opening and ended up closing with yet another deep cut.

Headline index Nifty had a modest gap up opening, but gradually pared all its opening gain in the morning trade. The afternoon session had Nifty slipping further, though it recovered again to trade with a modest gain. The last hour of the trade remained particularly brutal as Nifty saw a parabolic decline and ended near its low point while losing 182.95 points or 1.32 per cent.

We have one of the most important domestic external event – Union Budget – slated to come up on Monday. The market, in its runup to the Budget, has approached it on a much lighter way. Nifty has come off over 1,150 points in a near-vertical way before the Budget. This can be viewed from two angles. First, we can say that the market has little expectations from the Budget. The second possibility could be that the market is approaching the Budget with a high degree of caution. This is reflected in the NIFTY PCR which is at 0.98. A PCR of 1 means that both Puts and Calls are being written in equal proportions. Volatility continued to surge with India VIX climbing up 4.33 per cent to 25.3425.


Analyzing the market in a mechanical manner ahead of such an important event would be meaningless as technical levels tends to get defied. A Budget day session is usually a typical one. We can expect a sideways and capped movement in the morning trade. Volatility will creep in once the Budget proposals start rolling in.

As we approach the Budget, we need to keep in mind the tapering off of the current risk on setup. Despite a technical pullback that the market may give if it reacts to the Budget proposals in a positive way, the current technical setup and the sector rotation analysis shows that barring PSU banks, all other financial stocks like financial services, private banks, etc, are indicating a sharp loss of relative momentum against the broader market.

Some technical pullback cannot be ruled out after violent reactions to the Budget. It is strongly recommended that in the event of any sharp technical pullback, high beta names should be chased but with a highly vigilant profit protection at every level. On the other hand, in the event of any downside, rather than trying to pick high beta names at lower levels, focus should be laid on picking up good stocks from defensive sectors like IT, pharma, FMCG and consumption.

The market is also likely to adopt an overly cautious approach against possible levy of any additional Covid-related cess, tampering with STT or LTCG, or giving any such financial aids which may be perceived as wasteful and adding to the fiscal deficit. The market has removed much of the toxicity that existed, given its excessive running up ahead of its curve by shedding bulk of the OI in the futures segment over the previous sessions.

A large bearish engulfing candle occurred on the charts. The formation of such a candle following a steep downside often marks a potential bottom in place. However, this would need confirmation on the next trading day. Nifty's getting back above its 50-DMA, which stood at 13,743, would be crucial on a closing basis.

The prudent way to approach the market on Monday is to wait for the proposals to get digested fully by the Street and take positions once the directional call is clear.

(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)