Nifty outlook: Pullback overdue; stay away for now, avoid shorts

An overdue technical pullback continued to evade the oversold domestic equity market, as the benchmark Nifty50 extended its losses for yet another day on Friday. After opening on a negative note, the market had recovered nearly all its gains by mid-session. However, the second half saw the recovery got pared again.

Subsequently, Nifty ended the day losing 94.90 points, or 0.94 per cent. Many of the critical support levels were tested and mildly violated during that session.

The 10,026 level is the 100-week moving average and also a serious pattern support on the higher timeframe charts. On the other hand, the current levels on the daily make the market look quite oversold on the lead indicators.

Mondays opening and the market trajectory from there on would again be extremely important to watch. With the downsides that we witnessed recently, the market has shifted its resistance levels lower. In the event of a pullback, Nifty would face resistance in the 10,250-10,275 zone, instead of 10,400, which would come later. On the lower side, the next major double bottom support exists in the 9,950-9,900 area.

The RSI on the daily chart stood at 30.1917. It remains nearly oversold and shows a bullish divergence against price. The daily MACD remains bearish even as it trades below its signal line. No significant formations were observed on the candles.

Another important factor to take note of is that volatility has increased immensely over the past couple of weeks. This has resulted into the Bollinger bands getting nearly 84 per cent wider than normal. This shows it is high time for volatility should drop, and the market to return in a normal trading range.

We recommend staying away from taking any major directional call. Fresh shorts should be avoided, and purchases should be kept selective and limited to certain sectors and stocks which are rotating favourably to ensure relative outperformance. Maintaining a cautious view on the market is advised for the day.

Stocks to watch:
We saw significant shorts creation in YES Bank, Equitas, ICICI Bank, Bhel, ONGC, State Bank of India, Tata Motors, Tata Motors DVR, ITC and Motherson Sumi.

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

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