Markets got an out-of-the-blue jolt from the RBI when the central bank raised the rates in the middle of its usual cycle which is one month away. The markets anyways had a weak start to the day. As it had opened after a gap of one day after the Eid break, it was trading in the negative while it was adjusting itself to the global trade setup. However, the announcement from the RBI delivered a rude jolt to the markets. The markets saw a sharp corrective bout which took the NIFTY close to 16600 levels. No major pullback was seen from the low point; the benchmark index closed with a deep cut of 391.50 points (-2.29%).
The rate hike has come as a first hike after two years; the Federal Reserve is also slated to come up with the rate hike decision. The Bank of England is also expected to move ahead with its fourth-rate hike. Regardless of the FOMC decision, the markets have discounted the rate hike of 50-bps; and in fact, there is a fear of a more aggressive stance in the markets. No additional adverse remarks and just the 50-bps rate hike by FOMC may be taken easily by the markets going ahead. Coming back to the Indian markets, the markets have piled up a massive number of short positions as clearly evident from the derivatives data. The NIFTY current month futures have added over 15.17 lakh shares or a huge 16.42% in the net Open Interest. This clearly indicates a large build-up of short positions in the market.
Thursday is also the expiry of the weekly options. Regardless of any unfinished knee-jerk reactions, the NIFTY is likely to find resistance at 16800 and 16885 levels. The supports come in at 16600 and 16510.
The Relative Strength Index (RSI) on the daily chart is 39.55; it has marked a new 14-period low which is bearish. However, it is neutral and does not show any divergence against the price. The MACD is bearish and stays below the signal line.
The NIFTY has violated the support area of 16800-16850; in the process, it has dragged its resistance points lower. Any pullback will theoretically find resistance near this zone.
However, one must not disregard the number of fresh shorts that have been added to the system. Even if there is any weakness, it is strongly recommended that it would be best to avoid shorts as the markets are very likely to invite support at current or lower levels. While focusing on low beta defensive stocks, a cautiously optimistic approach is advised for the day.
This was first published by The Economic Times.
Milan Vaishnav, CMT, MSTA
Consulting Technical Analyst
Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)
