Trade Setup: Nifty susceptible to sharp and violent corrective moves, avoid shorts

The weekly options expiry in the domestic equity market panned out on expected lines on Thursday as the headline index Nifty stayed within a range, but continued posting new highs.

There was no stopping for the market as the index piled on gains, despite being heavily overbought and overstretched on the charts. The market opened on a quiet note but remained within a rising trajectory, while making incremental gains softly. After marking the high point of the day during late afternoon, the index came off a bit and finally settled with a net gain of 58 points or 0.42 per cent.

The analysis continues to remain on the existing lines. Nifty remains overextended, overstretched and grossly overbought on the daily charts. However, with no letting up of weakness in US dollar, we are seeing a relentless rally fueled by liquidity. As we continue to follow the momentum, it should be kept in mind that such unabated up moves have made the market susceptible to equally sharp and violent corrective moves, whose timings cannot be predicted as they remain overdue. Volatility cooled off a bit with India VIX coming off by 0.22 per cent to 19.1575.


Friday's session may see the levels of 13,800 and 13,865 acting as overhead resistance levels, while support would come in at 13,660 and 13,610.

The Relative Strength Index (RSI) on the daily chart is 80.86; it stays highly overbought and has marked a new 14-period high which is bullish. However, it does not show any divergence against price. The daily MACD is bullish and remains above the Signal Line. A Spinning Top has occurred on the charts. It results out of a small real body and reiterates that we should continue approaching the market with great caution under the present technical setup.

All in all, the market has turned highly stock-specific and will continue to remain so over the next couple of days. The undercurrent has been extremely strong. However, the absence of any corrective move or even a meaningful range bound consolidation is making the current move highly unhealthy and is also making the market vulnerable to violent profit taking bouts from current and higher levels.

Under the present technical setup, shorts should be avoided unless any confirmed sign of weakness is seen. However, momentum should be continued to be followed very cautiously. All moves on the higher side should be used more for protecting profits than for making new purchases.

(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)