Trade setup: Nifty oversold, but is struggling to find a bottom

The expiry of October derivative series on Thursday did not bring any good news for the Indian equities. Following overnight weakness in the US markets and then Asian stocks in the morning, Nifty opened in the negative and drifted even lower.

Despite making some recovery, the index ended the day with a loss of 99.85 points or 0.98 per cent.

The market is caught between severe contradictions. On one hand, it is nearly oversold and showing all possibilities of a technical pullback. On the other hand, the global weakness is making Indian stocks testing their support levels.

The Fridays opening and the trajectory that Nifty forms will be extremely critical to watch out for. It is now getting increasingly important for the market to defend its previous low of 10,080 and move back into the 10,180-10,250 zone as soon as it can.

Friday is likely to see the levels of 10,180 and 10,250 acting as a potential resistance area. The support may come in at 10,080 and 10,010 zones.

The Relative Strength Index (RSI) on the daily chart stood at 32.2295 and it showed bullish divergence against the price. The daily MACD remained bearish while trading below its signal line.

A Doji occurred on the candles. With such formation occurring near the supports or within the supports filter, while the market is nearly oversold, showed the desperate attempt by Nifty to form a temporary bottom.

Overall, RSI continued to show bullish divergence against the price and the candles suggested desperate attempts for bottom formation.

Also, with the market nearly oversold, Nifty justifies and makes a clear case for an imminent technical pullback, even if it remains short lived.

Amid these contradictions, we recommend staying away from making bargain purchases while keeping them extremely selective. Shorts should still be avoided. Cautious view on the market is advised for the day.

STOCKS TO WATCH: Short positions were seen being added in South Indian Bank, IDFC Bank, GMR Infra, YES Bank, IDBI, SAIL, ICICI Bank, Vedanta, Ashok Leyland, Tata Power, Tata Motors, Dish TV, BHEL and NCC.

(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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