Trade Setup: Minor correction overdue; prudent to focus on defensive stocks

In yet another session of consolidation, the domestic equity market witnessed a range-bound session and ended with a marginal gain last Friday.

On the expected lines, the headline index Nifty opened mildly positive, but on a quiet note. However, the index soon sharply drifted into the red and slipped nearly 100 points from the opening levels. Just when it seemed that a corrective mode has set in, the index soon set itself in a rising trajectory. For the rest of the day, it gradually trended higher and closed with a marginal gain of 19.85 points or 0.14 per cent.

Despite an over 2,000-point rally which includes over 1,700 points since the breakout from 12,000 levels, the refusal of the market to correct shows the amount of underlying strength. However, this is not a reason enough that we throw caution to the wind as even if this rise must sustain, this has to be accompanied by some minor correction or at least a ranged consolidation. Also, we need to keep in mind that this is a purely liquidity driven rally fueled by an extremely weak Dollar Index, which itself may show some technical rebound.


As we continue to follow the momentum cautiously, the levels of 13,800 and 13,840 will act as potential resistance points, while support will come in much lower at 13,660 and 13,580 levels.

The Relative Strength Index (RSI) on the daily chart is 81.22; it remains steeply overbought. The RSI has marked a new 14-period high which is bullish; it stays neutral and does not show any divergence against price. The daily MACD stays bullish and above the Signal Line.

A classical Doji has occurred again on the charts. As always, given its potential to temporarily disrupt the current move, it warrants caution. However, to confirm its potential bearish effect, we will need a confirmation on the next bar.

Regardless of the quantum of the liquidity that is chasing the market, some cooling off is now overdue. Given the current technical setup and the overextended move on the front-line index, it would be prudent to focus on stocks that are either defensive or already under consolidation and have recently underperformed the broader markets. Staying with such stocks which has an improving Relative Strength will keep the risk-reward profile more favorable while following the momentum with the highest degree of caution.

(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)