Trade setup: Nifty50 outlook bearish; steer clear of technical pullback

In a sharp reaction to weak global cues, the domestic equity market plummeted on Monday, with all Nifty50 stocks ending in the red. The index opened gap-down and traded in a capped range in the first half of the session. The sell-off intensified in the second half, as it finally ended with a loss of 242.25 points or 2.01 per cent at 11,829.40.

Technically, the headline index has violated multiple levels on the daily chart. It opened below the short-term 20-DMA and went on to slip and close below the crucial 100-DMA, which is at 11,956. Any upmove will now face resistance at this point.

The Volatility Index India VIX witnessed a sharp surge of 24.07 per cent to the 16.70 level.

Depending upon the weakness in the US stocks, 11,900 and 11,945 levels will act as strong resistance in Tuesday’s session. Support may come in at 11,800 and 11,765.

The Relative Strength Index (RSI) on the daily chart stood at 40.33, and marked a fresh 14-period low, which is bearish. The indicator did not show any divergence against the price.

The daily MACD was bearish, and it traded below its signal line. Moreover, the indicator is at present below its centerline.

A falling window was formed on the candles. A large black body occurring with a gap makes the present setup more bearish. Such a formation usually implies continuation on the downside.

As per pattern analysis of the daily chart, Nifty has broken down again from the broadening formation. Going forward, the level of the lower trend line of the broadening formation will be a stiff hurdle to top. The index has also slipped below the crucial 100-DMA, which is at 11,956.

With the intensity of the decline, the market has shifted resistance zone lower to 11,900-11,950. Any technical pullback will find strong resistance in this range.

We would recommend traders to avoid significant purchases and continue to remain light on the positions. All upmoves would be nothing more than a mere technical pullback, which must be used for protecting profit at higher levels.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at [email protected])