Trade setup: Short covering driving up Nifty50; avoid fresh purchases

The 10,590 and 10,635 levels will act as immediate resistance points in Friday's session.

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Thursday’s high was just below the most important confluence area of two resistance points.
Short covering continued in Indian stocks for the third day in a row as Nifty continued to advance and ended the session with gains. The expiry of weekly options continued to rule to roost, as it dominated the trend for the entire session. Maximum Call open interest in Nifty shifted from strike price 10,500 to 10,600 and it ensured that the index moves past 10,500 level and settle below the 10,600 mark.

The market saw a modestly positive start. After trading in a range in the morning session, Nifty picked up strength in the second half. While bank and financials stocks grossly underperformed, Nifty ended with net gains of 121 points, or 1.17 per cent.

Thursday’s high was just below the most important confluence area of two resistance points. If Nifty extends its up-move and tests 10,600 level and go a bit higher, it will meet the confluence of the two pattern resistances that exits in form of one rising trend line and a multi-year support line that extends from the bottoms formed a year back.


Volatility dipped to a new low with the volatility index, INDIA VIX, dropping by a further 5.73 per cent to 26.5075. Friday session will see a stable start. The 10,590 and 10,635 levels will act as immediate resistance points, while supports come in much lower at 10,465 and 10,410 levels.

The Relative Strength Index, or RSI, on the daily chart stood at 66.88; it showed a sharp bearish divergence against the price. Nifty has marked a fresh 14-period high, but the RSI has not formed a fresh high on the similar lines, which has resulted in a sharp bearish divergence. The daily MACD has turned bullish again, as it has shown a positive crossover to trade above the signal line.

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Pattern analysis showed Nifty has advanced further in the upward rising channel. It is likely to test the confluence area of two resistance points if it continues to advance further. The up-move that has taken place over the past couple of days has been because of covering of massive short positions that existed in the system. Nifty futures discount, which was as steep as 68 points at one point, has now reduced to just 12 points. This was the result of sharp short covering that bridged this discount and eliminated the bulk from the shorts.

Given the present technical setup, we recommend staying away from making fresh purchases or keeping it extremely limited and stock-specific. In the event of any continued up-move, more emphasis should be laid on protecting profits at higher levels than using it to make new purchases.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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