If Nifty breaks 18,800 support, then it may fall another 300 points, says this technical analyst

Nifty is at a bullish harmonic cypher pattern currently and is also covering the gap up of June 28. That area is right between 18,830 and 18,860. Nifty has already covered two gaps in the last two days. If Nifty starts sustaining above 19,050 spots, only then I would start looking at long positions. On the daily charts, it has become extremely oversold at this juncture. So fresh shorting is not a conducive thing to do here.

But if Nifty fails to hold this gap area, and turns back to 18,800, then another 300-point decline can come from here. So it's all a wait-and-watch now.

Also Read: Rise in volatility index makes traders jittery. A sharp directional move in Nifty may be coming

In the case of Bank Nifty, I feel that it has to crawl back above 42,700. I will not be touching it till it makes that move. If it does not, then it can come all the way down to 41,500 to 41,000. So I can't see any major support level on the screen right now for Bank Nifty. No bottom fishing in the case of Bank Nifty at all at this current level. That's the only sector that is actually causing mayhem. In fact, the Nifty IT index is actually at a much better level than the Bank Nifty.

What should traders be doing right now?

It's more of a wait-and-watch and enters and avoid fresh shorts because right now the risk reward for a short position is extremely bad. If you go short out here, then your earliest stop loss for Nifty is quite high, almost at 19,050. So for 70 bucks reward, you have a 100-150 points stop loss.

Furthermore, today is settlement week. Currently, retail is excessively bullish in the market while FIIs have smartly covered their short positions yesterday (October 25). If we go back 10 days, FIIs were approximately 2.5 lakh net short in stock futures. Now there are just 60,000 net short positions.

So today is more about panic for retail clients, and less about trends.

Also Read: Nifty slips below 18,900 in biggest losing streak since 28 Feb; US bond yield surge, inflation concerns loom large

How are FIIs positioned at the moment and what does it signal?

On Friday's close, for every one index call long, the FIIs had three-and-a-half index puts long. So they were extremely bearish. As per yesterday's close, they brought that down to 1.75.

So FIIs profit-booking inputs and adding longs. You rarely see FIIs going against the trend, so it is the first sign of a glimmer of hope.

The other factor is that the put-call ratio is at an extremely oversold zone, 0.57 right now. It is just a matter of waiting for a confirmation to pounce on a long right now.

And that confirmation is 19,050 right now? 

As every hour passes by, the trigger to enter comes down. For me, currently, it is at 19,050.

What are the charts saying about midcaps and smallcaps right now?

I would be more focused on large than mid- and small-caps for the initial sign of reversal because you need large caps to come in front now. Plus, in the last few days, we've seen heavy long unwinding in smallcaps and midcaps. So, they might take more time to turn. Largecaps need to turn first, hold the fort and then we could see some recovery coming.

Sector-wise, Nifty IT, Nifty Pharma, and Nifty Auto are all three at very strong support levels right now.

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