On the Budget day, the market formed a significant trend reversal formation. Nifty failed to surpass the previous high, placed at 12,100 and closed lower below 11,850, which is grossly negative for the market.
It implies that the market participants are disappointed and should trigger further damage to the market. Technically, Nifty is heading for 11,590 with minor support placed at 11,680.
In technical analysis, charts are the same for every analyst but interpretations of those charts are different. So, we need to go through with the majority of such interpretations.
1. Before expecting further weakness, Nifty needs to trade below the lowest of July 5 session (11,790). The highest and lowest levels of the event day are equally important as the importance of broader formation.
2. Below 11,790, Nifty would open the possibility of a Triangle formation then its first stop would be at 11,680 and maximum downside could be placed at 11,590.
As per our observations, the lowest and highest level of the Elections day outcome (May 23) will act as a trend deciding levels in the long-run for the market.
3. If Nifty is forming the possibility of corrective pattern, then it would fall to 11,425, where Nifty has left a bullish gap on the day of an exit poll on May 20, 2019.
4. If Nifty closes below 11,420, then it could even fall down to 11,000.
5. If we see a gap-up opening for Nifty on July 8 and if that sustains then it would be a bull trap and could lead to another attempt towards 12,100.
Form the above possibilities, the last one looks most unlikely. As the market failed to make a new high on the Budget day, we are of the view that the third option has the highest probability.
Strategy for traders should be to create short positions by purchasing Put options of 11,600 strike for July 25, 2019 in two tranches. Buy the first tranche if Nifty opens between 11,750/11,760 and add the second one if Nifty bounces to 11,900.
Here we should be ready to lose the entire premium up to Rs 70. We would make handsome returns if Nifty comes closer to 11,600 or goes below 11,600 in the next few days.
Sector specific:
Except for Nifty PSU bank and Nifty FMCG, other indices are showing signs of weakness. Select stocks from above indices should be added on declines with a medium-term view.
The author is a senior VP (Technical Research), Kotak Securities.
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