Trade Setup: Holding 17,500-level key for Nifty50 to see further technical pullback

Indian equity markets scrambled to find a bottom for themselves on Tuesday, but it was not before a jittery start to the day. Tuesday’s session saw the market open once again on a negative note. However, this time the low point was marked in the initial minutes of the trade. Following a negative start, Nifty50 spent the morning session trying to gradually recover. It went in the positive territory and got stronger as the day progressed. The headline index went past the 17500-level and managed to keep its head above that. Finally, the benchmark index ended with a gain of 86.80 points (+0.50 per cent).

Although it was just 0.50 per cent of gain on a closing basis, what was more important was the near 350 points recovery by Nifty50 from the low point of the day. Another important thing to note was that the shorts, which were practically absent, have begun to surface. This was reflected in the decent amount of PUT writing that was seen at 17300, 17400, and 17500 levels. In fact, 17500 saw the maximum addition of PUT OI of 2.1 million shares. This shows that if Nifty50 can keep its head above the 17500-mark, we may see some more extended technical pullback over the next two days.

We enter the penultimate day of expiry of the current monthly derivative series. Wednesday is likely to see the levels of 17600 and 17635 acting as resistance points. The supports come in at 17420 and 17350 levels.

The Relative Strength Index (RSI) on the daily chart is at 38.79; it is neutral and does not show any divergence against the price. The daily MACD is bearish and below the signal line. Nifty50 formed a large white-bodied candle on the daily chart; this reflects the directional consensus on the upside of the market participants. Also, a piercing line has occurred; if the low point of this candle is protected, it may lead to a reversal point and the market may put a temporary base in place. However, this will need confirmation.

All in all, the markets are not entirely out of the woods as yet; however, there are greater chances that it has put a temporary bottom in place. However, to cement its effort of a technical pullback, it would be a desirable situation that Nifty50 moves past the 50-DMA which presently stands at 17854. An occurrence of this will ensure that the markets remain in a broad consolidation and do not show any kind of a breakdown in form of any incremental weakness from the current levels.
It is recommended to continue staying light on the leveraged exposures. Any downsides, if at all they occur, should be used to make very select purchases. While avoiding shorts, the focus should be on the stocks that are showing improved Relative Strength. Pockets like select banks, pharma, consumption and autos may relatively outperform. A cautiously positive outlook 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 [email protected])