Key indicators hint at more weakness for Nifty50

Asia's Tech News Daily

Nifty, Nifty50, DMA, VIX, Nifty Technicals

Technical and derivatives analysts see more bearishness going ahead for the Nifty after a decline of over 4 per cent last week in the wake of a new coronavirus variant triggering a panic sell-off across the globe. The Nifty ended down 509.80 points, or 2.91 per cent, at 17,026.45 on Friday. Analysts said the index slipped below the crucial 17,100 level on Friday and its 20-day simple moving average has given a negative crossover to 50-day SMA — both indicate more weakness ahead.

SIDDARTH BHAMRE, DIRECTOR-ALTERNATIVE INVESTMENTS AND RESEARCH, INCRED EQUITIES

Do you expect the Nifty to weaken further?

The trend in the Nifty has been down with the formation of lower-top lower-bottom on daily charts. Also due to Friday’s fall there is a negative crossover of 20-day moving average (DMA) and 50-DMA. This is a confirmation of a downtrend technically. 200-DMA as of now holds around 16,000. We believe the direction may remain negative for some more time. Weakness and the nature of the fall in crude and other commodities is also not comforting.

What should investors do?

This is a global correction and there is fear of a third Covid wave. Traders should not be in a hurry to do bottom-fishing. Foreign investors have squared off longs and formed fresh short positions. Defensives rallied or were stable while high-beta growth sectors like metals, auto and BFSI (banking, financial services and insurance) corrected. The Bank Nifty is very much near its 200-DMA, and in all likelihood, it will breach it too. This is a typical risk-off fall we experienced last week. Till the time the tide doesn’t turn, we suggest staying light in the markets and if you are a long-short trader then have more of short positions than longs.

CHANDAN TAPARIA, DERIVATIVE ANALYST, MOTILAL OSWAL

Do you expect the Nifty to weaken further?

Nifty has negated its formation of higher-high higher-lows on weekly scale and corrected sharply by more than 4 per cent last week. It has broken a key support of 17,350. It recently completed a bearish head and shoulder pattern at the market top, fallen below a rising support trend line and is holding below key moving averages which doesn’t bode well for the bulls. Till the Nifty holds below 17,350, any bounce could be sold and weakness may persist towards 16,500. Medium-term hurdle can be seen at 17,500. The index is trading below its 50- and 100-day moving averages and the weakness could continue towards 200-DMA. India VIX spiked 40 per cent last week and jumped from 14.86 to 20.80. The spike in volatility indicates that market sentiment has taken a sharp hit along with the spike in CBOE VIX in the US market.

What should investors do?

Index traders can initiate Bear Put Spread by buying 17,000 put and selling 16,500 put with premium cost of around 150 points to hedge the downside. Stock specific positive setup is seen in Cipla, Divi’s Laboratories, Escorts, and Zee Entertainment while weakness may continue in most of metals, banking, fastmoving consumer goods and auto stocks.

RAJESH PALVIYA HEAD-TECHNICALS AND DERIVATIVES, AXIS SECURITIES

Do you expect the Nifty to weaken further?

The Nifty has given breakdown to its critical support level of 100-day simple moving average. The 20-DMA has given a negative crossover to 50-DMA indicating more bearishness ahead. If the Nifty breaks below 17,000, it may fall towards 16,700. Below 16,700, it may fall further towards its major long-term support of 200-DMA at 16,080. However, on the higher side, 17,250-17,400 are the levels where one can use small pullback as selling opportunity. If the Nifty is unable to cross and sustain above 17,550-17,600, it will remain in a weak zone and any pullback near that level is likely to be met with supply pressure .

What should investors do?

For the weekly expiry of December 2, we are suggesting a bearish strategy called ‘Put Ladder’ which involves buying one lot of Nifty 17,050 Put at Rs 169 and selling of one lot each of 16,800 Put at Rs 88 and one lot of 16,550 Put at Rs 45. The maximum profit of Rs 10,700 will be attained at 16,800 levels, while the strategy will start making loss above 17,020. The cost of the strategy involves outflow of Rs 1,800 which is the maximum loss if the Nifty closes and remains above 17,000. Below 16,265 it is advisable to exit the strategy in total to avoid unlimited losses.

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