The markets had a very weak day on Friday as it inherited a severely weak global trade setup. Following a deep red overnight in the US markets, the Asian markets too started on a negative note. India was no exception. The Nifty saw a gap-down opening on Friday and continued to trade with losses throughout the day.
The index showed no intention to recover during the day. However, the trading range in the entire session was just 80-odd points as the index kept oscillating in this limited range before it closed with a net loss of 271.40 points (-1.63%).
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If we look at a chart in isolation, the technical setup looks pretty weak. The Nifty has gapped down from its key support and usually, such technical setups are expected to infuse some more weakness in the markets.
However, one important thing that we cannot afford to overlook is the quantum of shorts that the markets are adding with each decline. Even on Friday, the Nifty May futures added over 5.03 lakh shares or 4.86% in net Open Interest.
This was the third day in a row that saw fresh shorts getting piled up in the system. At any point in time now, we can expect these shorts to lend support to the markets.
Monday is likely to see the levels of 16,510 and 16,580 acting as immediate resistance points. The supports come in at 16,350 and 16,280 levels.
The Relative Strength Index (RSI) on the daily chart is 35.29. It has marked a new 14-period low which is bearish. However, it stays neutral and does not show any divergence against the price. The daily MACD is bearish and stays below the signal line.
A falling window emerged on the candles as a result of a gap-down opening in the markets. Usually, such formations result in the continuation of the trend. However, this will need confirmation on the next trading day and should not be traded in isolation.
All in all, the technical structure of the markets remains weak. However, given the quantum of shorts in the system, a technical pullback fueled by short-covering is overdue and imminent. Because of this, even the falling window on the candle should not be traded in isolation. There are strong possibilities that even if some incremental weakness is there, the Nifty may see the existing shorts lending support at current or lower levels.
Again, this would come with a caveat. This reading will be effective only if there are no further global weak technical setups to inherit. In the present circumstances, it is strongly suggested to continue to stick with low beta and defensive stocks. While strictly avoiding shorts, all downsides must be used to selectively pick quality stocks at current or lower levels.
(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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