Trade Setup: Keep an eye on Dollar Index and bond yields; defensive pockets may outperform

The domestic equity market saw a sharp upsurge as it made up for the Monday trading holiday and aligned with the global trade setup. Headline index Nifty had a gap-up opening and got stronger as the day progressed.

After opening on a robust note, the index strengthened and by afternoon, it successfully maintained its gains. It was a range bound trade in the afternoon, after which Nifty resumed its up move as it got stronger. The market managed to end near the high point of the day as it steadfastly managed to maintain and hold on to its gains. The headline index closed with a robust gain of 337.80 points or 2.33 per cent.

We enter the penultimate day of expiry of the weekly options, and also the penultimate day of the current week as Friday is a trading holiday. Nifty has managed to move past its 50-DMA at 14,769. Ideally, this level is now supposed to act as a support on a closing basis. This being said, it is important to note that the index remains very much inside the falling channel that it has created after forming a high point near 15,430. The falling trend line resistance stood near 14,950; the weekly options data also suggested maximum Call OI at 15,000 which has kept upsides in the market capped near this point.


US bond yields have spiked again; the Dollar Index stood above 93 at the time of writing this report. Wednesday's session is likely to see the levels of 14,900 and 14,955 acting as resistance points, while support will come in at 14,750 and 14,710.

The Relative Strength Index (RSI) on the daily chart stood neutral at 51.73 and did not show any divergence against price. The daily MACD was bearish and remained below its Signal Line. A rising widow occurred on the candles. This essentially results out of a gap and has bullish implications; however, the present gap has occurred inside a pattern and therefore it is an area gap and has little significance within the present technical setup.

Even if the index shows some incremental upsides, the up moves are capped in the next 100-odd points range. Also, it would be prudent not to ignore the strengthening Dollar Index and the spike in yields. The defensive nature of the market seems to be in force again as IT stocks and FMCG stocks have started to improve again on their relative strength against the broader market. Such defensive pockets are likely to relatively outperform the broader market. We reiterate that staying stock-specific and protecting profits at higher levels will be important. A cautious approach towards the market is advised for the day.

(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)