Nifty outlook: Market vulnerable to profit taking; stay stock specific

The domestic market continued with its follow-up rally on Friday and ended with decent gains. The indices opened higher and got even stronger in the second half of the session. The Nifty50 ended the day gaining 145.30 points, or 1.28 per cent.

What we saw on Friday was short covering for the second session, which the market has been witnessing after a sharp corrective move seen in the first half of the week.

The Nifty50 has so far held on to its 50-DMA on the daily charts and has taken support at the rising trend line it has formed from the 10,000 mark. Going into Monday’s session, we expect to see a stable opening. However, the market still remains vulnerable to consolidation at higher levels.

We expect the 11,545 and 11,610 levels to act as technical resistance to Nifty, while supports should come in at 11,465 and 11,410 levels.

The Relative Strength Index, or RSI, on the daily chart stood at 53.2729 and it remains neutral and shows no divergence from price. The daily MACD stays bearish as it trades below the signal line. On the candles, a rising window has occurred.

This is a gap on the bar and usually implies continuation of the upward move. However, in the current context, it needs to be taken with caution. It also requires a confirmation on the following bar.

Pattern analysis shows a sharp reversion to the mean, as the Nifty tested the 50-DMA after running too much ahead of its curve. Though it has held on to its support at the 50-

DMA, it remains little overstretched on the higher time frame charts and, therefore, needs to be approached with caution.

Overall, we still expect Nifty to remain in a broad range of consolidation. With the primary uptrend still intact, and with room for more consolidation, the market remains vulnerable to bouts of volatile profit taking at higher levels. In the current scenario, we do not recommend creating shorts.

The upward moves should be used to protect profit while downsides, if any, should be utilised to make select purchases. Sectors and the stocks that did not participate in the previous rallies may come into focus. While maintaining modest exposures, a highly stock-specific approach is advised for the day.

Stocks to watch:
On Friday, short covering was seen in stocks like Yes Bank, SAIL, Vedanta, Tata Global, IOC, ICICI Bank, State Bank of India, Hind Petro, Federal Bank, DLF, BPCL, India Cements, ITC, Dabur, Sun Pharma and Tata Steel.

(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)