Nifty: Trade Setup: Every bounce is now prone to selloff; Nifty may consolidate

The Indian equity market got a rough start to the week, as it opened with on a negative note and closed even weaker by the end of the day. In the previous technical note, we had mentioned that the breakout is something that should not be anticipated or taken for granted, especially in the current technical setup. Nifty saw a weak start in the morning and traded sideways, showing some resilience to the prevailing weakness. However, the second half of the session saw the market turn weaker. The headline index finally ended the session with a net loss of 171 points, or 1.07 per cent.

Throughout the day, the 15,800 level saw heavy Call writing; this strike price added over 4.9 million in Call Open Interest. This saw Nifty’s resistance level shift lower from 16,000 to 15,800 level, as this point held maximum Call OI followed by 15,900.

This means the 15,800-15,900 zone will offer serious resistance going ahead from here. On the lower side, near similar Put OI was seen in the 15,700-15,500 zone.

Volatility spiked as INDIA VIX rose by 8.33 per cent to 12.6800. Monday’s session has inflicted some technical damage on the charts; the 15,900-15,950 zone has now become an intermediate top for Nifty unless it is taken out convincingly.

Nifty is likely to see a tepid start to Tuesday’s trade, and the 15,790 and 15,845 levels will act as potential resistance points, while supports will come in at 14,700 and 14,605 levels.

The Relative Strength Index (RSI) on the daily chart stood at 51.44; it stays neutral and does not show any divergence against price. The daily MACD remains bearish and trades below the Signal Line. A Doji occurred on the candles. However, more importantly, a Falling Window also occurred. This resulted out of a gap-sown start, and since this Falling Window candle occurred near the resistance point, it has reinforced the credibility of resistance in the 15,900-15,950 zone.

Usually, such candle formation has bearish implications though they require confirmation on the next bar. There are two distinct interpretations in the current technical setup. First, so long as the 15,900-15,950 zone is not taken out convincingly, all bounces, or pullbacks will stay vulnerable to bouts of profit taking at higher levels. Secondly, as long as the 15,450 level remains defended, the market will remain in a broad consolidation range. Given the current technical setup, we recommend continuing to approach the market with a highly selective approach, while protecting profits on either side of the trade.

(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)