Trade Setup: Nifty may swing either way; volatility likely to increase

After consolidating below 13,550 for four days, the already overextended domestic benchmark equity index Nifty pushed itself higher to end once again on a new closing high.

The market had a decently positive start to the day. After maintaining modest gains and staying rangebound in the first half of the day, the market got even stronger after a minor blip in between. Nifty went past 13,650 and maintained gains throughout the day until the end of the session, although it stayed rangebound again in the last hour of the session. Nifty finally ended the day with a net gain of 114.85 points or 0.85 per cent.

The weekly options expiry data will influence trade in the coming session on Thursday. Heavy Put writing was seen at 13,600. Following this, the 13,500 level has the highest Put OI concentration while maximum Call OI remains at 13,800. All options are now open for the market to swing in either direction. Although overnight cues will have its say at market opening, we are set to enter a period where we will see an increase in volatility. However, in Wednesday's session, volatility index India VIX came off by 0.74 per cent to 19.2000.


Thursday's session will see the levels of 13,730 and 13,800 acting as resistance points, while support would come in much lower at 13,560 and 13,500 levels.

The Relative Strength Index (RSI) on the daily chart is 79.81; it has made a fresh 14-period high which is bullish. The RSI is neutral and does not show any divergence against price, while staying in an overbought zone. The daily MACD is bullish as it trades above the Signal Line.

A rising window occurred on the candles. This essentially is the result of a gap-up and usually implies the continuation of an uptrend. However, in the context of the present technical setup, it also resembles a Spinning Top pattern which which results out of a small real body. In any case, it is recommended to stay highly cautious at current levels.

Overall, there are all possibilities of some incremental up move if there are no adverse overnight cues to deal with. However, regardless of this, Nifty is by now far more overextended from every possible angle. Not that this may lead to a crash in the market, but unless some meaningful consolidation happens, the market is in for an increased possibility of profit taking bouts at higher levels. These can be equally sharp and violent in nature and can lead to a sharp increase in volatility as well. A cautious view 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)