Beware of going short now, pullback likely anytime now: F&O expert

A bruising sell-off has seen the Nifty shed over 1000 points in the last seven trading sessions. Moneycontrol spoke to Sudeep Shah, Deputy Vice President and Head of Technical & Derivative Research, SBI Securities, for his views on the key technical trends he is monitoring.

Here is what he had to say:

Widening Gap between Nifty and 20-Hour MA

Currently, the index is hovering near its last line of defense, the 200-day EMA level, quoted at 18,830. An interesting observation on the movement of Nifty and the 20-hour Moving Average (MA) is that whenever the gap between Nifty and the 20-Hour MA widens, the index reverts to its mean. Presently, the index is nearly 2 percent below its 20-hour MA. Historically, when the difference between the 20-Hour MA and the index closing price stretched between 1.5-2 percent, the index has reverted to its mean.

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Aggressive Short Bets and Bollinger Bands

For the third consecutive trading session, the index is trading below its lower Bollinger band, usually a sign of an oversold condition. Moreover, most momentum indicators and oscillators are in an oversold condition on lower timeframes. Exercise caution when considering aggressive short bets, as short-term consolidation and a breather could be on the horizon, and the risk-reward ratio may not be favorable at this juncture.

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Nifty Levels to Watch
On the derivative front, the 18,900 strike has the highest open interest on the call side, followed by the 19,000 strike. On the put side, the 18,850 strike boasts the highest open interest, followed by the 18,800 strike. This suggests that the 18,810-18,830 zone will be crucial support for the index. Any sustained move below the level of 18,810 will lead to further correction in the index, down to 18,760, followed by 18,720. On the upside, the index is likely to encounter resistance at 18,910-18,915. Above 18,915, the index is expected to witness a short-covering move up to 18,970-19,010 levels.

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India VIX on the Verge of a Breakout

The volatility index, India VIX, has consolidated in a narrow range of 9.50-12.80 for the past 102 trading sessions. However, on Monday, it hit a low of 8.82 and subsequently saw a sharp pullback of nearly 40 percent in just three trading sessions. This suggests that volatility could continue its upside momentum in the next few sessions. The 12.80-13 zone will serve as crucial resistance for India VIX, as it coincides with the 200-day EMA (12.89) and previous swing highs. Any sustained move above the level of 13 will lead to a sharp upside rally in India VIX, potentially testing levels of 15.3, followed by 16.10 in the short term. On the downside, the 10.40-10.20 zone will act as immediate support for India VIX, Shah believes.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.