Trade Setup: Chances of major down move in Nifty limited; avoid shorts

After three days of strong technical pullback, the domestic equity market spent the second day consolidating with an inherently positive bias on Friday.

On the last trading day of the week, headline index Nifty opened on a modestly negative note, but soon crawled in the positive territory for a brief moment. As the selling pressure crept in, the index went very near to 17,400. However, the afternoon trade saw the market staging a remarkable recovery from its low point. Although ranged, Nifty recouped over 110 points from the low point of the day. It finally ended the day with a negligible loss of 5.55 points or 0.03 per cent.

Despite ending on a flat note, the index has gone to display buoyant undercurrent. The current month Nifty futures have shed over 2.58 lakh shares or 2.28 per cent in net Open Interest. This shows that the surge from lower levels was fueled by heavy short covering. Volatility also declined as India VIX came off by 3.27 per cent to 16.0600. With Nifty now above its 20-DMA of 17,458, it would be important for the index to keep its head above this point to avoid slipping into consolidation. The 100-DMA, which stood at 17,245, remained a very important support on a closing basis.


Monday's session is likely to have a positive start to the day. The levels of 17,550 and 17,630 are likely to act as immediate resistance points, while support would come in at 17,430 and 17,380 levels.

The Relative Strength Index (RSI) on the daily chart remained neutral at 50.22 and did not show any divergence against price. The daily MACD was bullish and stayed above the Signal Line. Apart from a Spinning Top that occurred on the charts, no other formations were seen.

Pattern analysis shows that despite a momentary violation of the 100-DMA on a closing basis, the market has been able to largely defend that point. This 100-DMA continues to stay as a major support in the immediate near term. On a very short-term perspective, the 20-DMA remains to be watched as any violation may push the index in some more consolidation again.

All in all, the market is likely to stay in a broad range with limited possibilities of any major down move. Some chances of consolidation cannot be ruled out before it moves higher but the underlying current seems buoyant as of now. It is recommended that creating shorts must be avoided. Instead, all down moves must be used to enter
defensive and relatively stronger stocks which are likely to relatively outperform the broader market.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)