Technical analysts across brokerages have turned their attention to a handful of price zones after this week’s sharp decline, and these levels are likely to guide short-term trading decisions in the sessions ahead. The Nifty 50 closed near 22,780 on Monday, slipping below a psychological support area that had held during earlier pullbacks. Anyone following Sensex Today will also recognise that the BSE benchmark has now moved decisively under the 73,000 mark. Chart-based views are never a substitute for fundamental research, but they do offer a useful framework for understanding where buyers and sellers have historically stepped in, and where the next reactions could emerge.
Table of Contents
- Understanding Support and Resistance
- The Levels In Focus Right Now
- Derivatives Signals
- Volatility And Market Breadth
- Limitations Of Chart-Based Analysis
- Practical Approaches For Different Investors
Understanding Support and Resistance
Support is a price zone where buying pressure has been strong enough to halt a slide, while resistance is a zone where selling has repeatedly capped a rally. These zones emerge as market participants recall prior turning points. Traders who had bought near a support and seen prices bounce off it, may well buy again if the zone is re-reached, while those who missed the bounce may view it as a fresh opportunity.
While a break below support may often turn it into resistance, as investors who bought at the level may look to cut losses once prices return to that level, the same logic explains why breakdowns attract selling.
The Levels In Focus Right Now
According to technical research heads at leading brokerages, the NSE benchmark’s zone of 22,900 to 22,950 is currently in focus as resistance while the support levels lie at 22,650 and 22,500. Rounding figures tend to have an unusual magnetic pull on the market as they tend to see a clustering of orders, especially in the options market where strike prices bunch at round numbers. With open interest piling up at a number of these levels, the index is often seen to find a floor or hit a ceiling as the week’s expiry nears.
Derivatives Signals
The options market also gives signals, with heavy call writing at higher strikes suggesting investors expect resistance to hold while the building up of put positions at lower strikes suggest support levels. Changes in these positions from day to day can also act as an early signal to shifts in mood while the put-call ratio – a widely-watched metric – gives a sense of the overall mood of the market.
Early signs from the Gift Nifty which trades ahead of the domestic session, can also set the tone. A weak signal on Monday morning, for example, set a bearish tone even before the cash market opened.
Volatility And Market Breadth
The India VIX – a gauge of expected volatility – tends to peak on sharp falls and trough near short-term bottoms. Market breadth, or the ratio of advancing to declining stocks, was massively negative on Monday with nearly every sector in the red. Breadth can be a good guide to whether a capitulation – where all the weak stocks have sold off – is imminent or if the corrective phase is set to deepen. Usually, only a few days’ worth of action is required to distinguish between the two.
Limitations Of Chart-Based Analysis
It is worth remembering that technical levels are not certainties but rather indicators. Price zones can be breached in the face of heavy news flow while changing geopolitical circumstances can rapidly undermine chart-based analysis. Analysts often revise their views as more information comes to light and so levels quoted on Tuesday can look very different a week later.
Investors who get too caught up in chart analysis without considering fundamentals run the risk of getting burnt when the narrative changes and a better approach is to combine the two. Technical levels can act as a guide to when to take profits or book losses, while fundamental research can decide what to buy in the first place.
Practical Approaches For Different Investors
Short-term traders can use the levels as a guide to where to set stop-loss orders. By putting an order to sell just beyond a key level, a trader can limit losses should the market move against them. Position sizing is also important given the potential for whipsaws in volatile markets.
Long-term investors, on the other hand, should not get unduly worried about corrections running into support. They should instead use such corrections to buy into quality stocks that have corrected sharply but look like good value on a fundamental basis. Rather than a single lump sum investment, dollar-cost averaging into a stock can help reduce the risks of buying at a peak.
As the week progresses, investors will be watching whether the index can reclaim the resistance zone or whether it slides to the next level of support. Either way, a rules-based approach is likely to serve investors best in the face of the emotions that volatility can provoke.
Key Points
- The Nifty 50 closed near 22,780, falling below a psychological support area.
- The NSE benchmark’s resistance zone is currently identified between 22,900 and 22,950, with support levels at 22,650 and 22,500.
- Heavy call writing at higher strikes in the options market indicates that investors expect resistance to hold.
- The India VIX, a gauge of expected volatility, tends to peak on sharp declines and hit lows near short-term market bottoms.
- Technical levels can be breached due to heavy news flow or geopolitical changes, highlighting the need to combine technical and fundamental analysis.
- Short-term traders should consider using technical levels for stop-loss orders, while long-term investors can view corrections as buying opportunities.
