Trade setup: Nifty50 may stage a short covering-led pullback

In yet another disappointing session on Dalal Street, the domestic equity market drifted lower for a fourth straight day on Wednesday amid weak global cues. Nifty opened on a much weaker note, but recovered most of its losses in the afternoon session. However, the market slipped further in the last one hour, with NSE Nifty testing its 200-DMA. The index finally settled 119.40 points or 1.01 per cent lower at 11,678.50.

The headline took support at the 200-DMA, which stands at 11,685. The volatility index, India VIX too surged 8.06 per cent to 18.26, and now trades near multi-month highs.

For the market to stabilise, the index will have to keep its head above the 200-DMA, failing which, it will see more weakness. For Thursday’s session and the coming days, the price action against the 200-DMA will be crucial to watch out for.

Thursday’s session is likely to see a shaky start, with 11,700 and 11,785 levels acting as immediate resistance. Support may come in at 11,650 and 11,600.

The Relative Strength Index (RSI) on the daily chart stood at 35.35 and marked a fresh 14-period low, which is bearish. However, the indicator did not show any negative divergence against the price. The daily MACD was bearish and traded below its signal line. Only a black body candle was formed on the charts.

As per pattern analysis of the daily chart, Nifty has seen a sharp decline and has tested its 200-DMA. With this zone currently at 11,685, the index has taken support at this level on a closing basis. On the downside, it has another double bottom support in the 11,600-11,625 range.

The expiry of the current derivative series is on Thursday, and this will keep the market dominated with rollover activities. That being said, it is important to note that in the event of any continued weakness, Nifty will move towards important pattern support.

Following a sharp decline over the past few sessions, the possibility of the market staging a short covering-led technical pullback cannot be ruled out.

We would recommend traders to refrain from creating fresh shorts as the risk-benefit ratio is unfavorable at this point. In the event of a further downside, short-term traders should stay away from creating fresh shorts. A highly cautious view is advised for the day.

(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)