Markets got a jolt from the RBI when the central bank raised the rates in the middle of its usual cycle, which is a month away. The markets already had a weak start to the day and opened after a one day gap after the Eid break. They were trading in the negative while adjusting to the global trade setup.
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However, the announcement from the RBI delivered a rude jolt to the markets. The markets saw a sharp corrective bout, which took the Nifty close to around 16,600. No major pullback was seen from the low point and the benchmark index closed with a deep cut of 391.50 points (-2.29%).
The rate hike has come as a first hike after two years. The Federal Reserve is also set to hike rates. The Bank of England is also expected to move ahead with its fourth-rate hike.
Regardless of the FOMC decision, the markets have discounted a 50 bps hike and there is fear of a more aggressive stance. No additional adverse remarks and just the 50-bps rate hike by FOMC may be taken easily by the markets.
Coming back to the Indian markets, the markets have piled up a massive number of short positions, clearly evident from the derivatives data. The Nifty current month futures have added over 15.17 lakh shares or 16.42% in the net Open Interest. This indicates a large build-up of short positions in the market.
Thursday is also the expiry of the weekly options. Regardless of any unfinished kneejerk reactions, the Nifty is likely to find resistance at 16,800 and 16,885 levels. The supports come in at 16,600 and 16,510.
The Relative Strength Index (RSI) on the daily chart is 39.55. It marked a new 14-period low which is bearish. However, it is neutral and does not show any divergence against the price. The MACD is bearish and stays below the signal line. The index has violated the support area of 16,800-16,850 and in the process, dragged its resistance points lower. Any pullback will theoretically find resistance near this zone.
However, one must not disregard the number of fresh shorts that have been added to the system. Even if there is any weakness, it is strongly recommended that it would be best to avoid shorts as the markets are very likely to invite support at current or lower levels. While focusing on low beta defensive stocks, a cautiously optimistic approach 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])
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