Nifty Charts: Trade Setup: Nifty may see existing shorts lending support at current or lower levels; stick to low beta and defensive stocks

Markets had a very weak day on Friday as they inherited an extremely weak global trade setup. After a deep red overnight in US markets, Asian markets also started on a negative note. India was no exception. The Nifty saw a lower open on Friday and continued to trade with losses throughout the day.

The index showed no intention to rally during the day. However, the trading range for the whole session was only around 80 points, with the index continuing to oscillate within this limited range before closing with a net loss of 271.40 points (-1, 63%).

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If we look at a chart in isolation, the technical setup looks quite weak. The Nifty has moved away from its key support and generally such technical setups should inject some more weakness into the markets.

However, one important thing that we cannot afford to overlook is the number of short positions markets add with each decline. Even on Friday, Nifty May futures added over 5.03 lakh shares or 4.86% net open interest.

It was the third day in a row that new shorts were piling up in the system. At any time now, we can expect these shorts to provide support for the markets.

Monday is likely to see the 16,510 and 16,580 levels act as immediate resistance points. Support stands at the 16,350 and 16,280 levels.

The Relative Strength Index (RSI) on the daily chart is 35.29. It marked a new 14-period low which is bearish. However, it remains neutral and shows no divergence from the price. The daily MACD is bearish and remains below the signal line.

A lower breakout appeared on the candles following a lower open in the markets. Usually, such formations cause the trend to continue. However, this will require confirmation on the next trading day and should not be traded in isolation.

Overall, the technical structure of the markets remains weak. However, given the number of shorts in the system, a technical pullback fueled by shorts coverage is overdue and imminent. For this reason, even the break that falls on the candle should not be traded in isolation. Chances are that even if there is progressive weakness, the Nifty may see existing shorts lend support at current or lower levels.

Again, this would come with a caveat. This reading will only be effective if there are no more other global weak technical configurations to inherit. Under the current circumstances, it is strongly suggested to continue to stick to low beta and defensive stocks. While strictly avoiding shorts, all downsides should be used to selectively pick quality stocks at current levels or below.

(Milan Vaishnav, CMT, MSTA, is a consulting technical analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based in Vadodara. He can be contacted at [email protected])

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