Trade Setup: Nifty up for a gap-down start. Will it be a chance to buy low?

Following a positive start to the day, Nifty got stronger and posted yet another new lifetime high for itself. It maintained steady gains in the morning session; however, as the time afternoon approached, the index pared those gains and slipped into the negative. The corrective pressure increased in the last hour of the trade and the market showed no intention of recovering from its low point. After coming off nearly 170-odd points from its high point, Nifty ended with a net loss of 45.75 points (-0.28%).

Markets are staring at two definite things as it approaches Friday’s trade. Nifty would open after the gap of a trading holiday and try and adjust to the global trade. The global trade setup is weak and this will see Nifty open with a gap down.

At the same time, we strongly expect Nifty to open near its strong support zone at 16,300-16,350. Therefore, it is also strongly expected that the domestic market will show resilience to the global weakness and may perform relatively better.

Nifty PCR across all expiries that had gone very near to 1.80 level has come down to 1.29, which is a healthy sign. The session will see the 16,300-16,350 zone offering potential support.
The Relative Strength Index (RSI) on the daily chart stood at 73.89; it stays neutral and does not show any divergence against the price. RSI continues to remain mildly overbought.

The daily MACD is bullish and above its signal line. A dark cloud occurred on the candles. This has the potential to stall the current rally and push the market into some consolidation.

We are likely to see a sharply divided behaviour among the stocks on Friday. With a gap-down opening nearly imminent, the key thing will be to see how much resilience does the domenstic market show in the face of global weakness. Given the current technical setup, we may expect the broader market to underperform the frontline Nifty. It is also expected that the stocks that have run up too much may see some violent shakeups.

On the other hand, some banks, the Bank Nifty index, per se, and few defensive stocks like those from pharma and FMCG may continue to show resilience to the weakness. We recommend avoiding to short the market and using the downside move to pick up quality stocks while using strict protective stops in place.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae and is based at Vadodara. He can be reached at [email protected])