Trade Setup: Nifty50 faces resistance at 15,700-15,745, more correction cannot be ruled out

What was long overdue happened in Wednesday’s trade. The Nifty50, which was seeing incremental highs with declining strength, got its first taste of violent profit taking during the session. The index had seen a decent start to the day. The market opened on a modestly positive note and maintained decent gains until afternoon by trading in a sideways trajectory. However, the second half of the session saw a very sharp corrective move; causing the Nifty50 index to give up nearly 250 odd points from its intraday high. Some recovery happened in the final hour of the session. The headline index closed the day with a net loss of 104.75 points (0.67 per cent).

We have weekly options expiry coming up. The strikes of 15,700 and 15,800 saw heavy call writing during the day. The level of 15,800 has the maximum concentration of call open interest buildup, followed by 15,700. The 15,700 level also saw heavy unwinding of the put open interest. All this indicates that the index is unlikely to move past 15,700 in the next session and this point will pose formidable resistance to the market. Volatility index India VIX slid below the 15 mark, declining 3.10 per cent to 14.7525 – its lowest level in the last 18 months.

Thursday is likely to see the levels of 15,700 and 15,745 acting as resistance points. Support comes in at 15,600 and 15,500 levels.

The Relative Strength Index (RSI) on the daily chart is at 65.56. It has moved below 70 from an overbought zone, which is bearish. RSI, however, is neutral and does not show any divergence against the price. The daily MACD is bullish and remains above the signal line. A large black candle has emerged. This marks the 15,800 level as an intermediate top for the market until it is taken out.

A pattern analysis of the daily chart shows that the Nifty index has shown a large bar after many small bars. Small bars mean trading sessions with very limited intraday ranges. This has occurred after small incremental upmoves from 15,750 to 15,800, which makes this zone a stiff resistance area for the market in the immediate short term.

The market breadth has been weak over the past few days. It remained particularly weak in the previous session with 39 stocks out of 50 declining in the Nifty universe. The VIX index is precariously close to its lowest levels. Even its current levels are the one of the lowest in recent times.

Even if some a mild pullback occurs, we strongly recommend staying away from making fresh purchases in the high beta stocks. New purchases, if any, should be kept strictly in the defensive space. Volatility may increase going ahead and the Nifty50 index showing some more corrective moves cannot be ruled out. A 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)