Trade setup: Nifty50 likely to see followup rally; 100-DMA still key

NSE Nifty on Thursday snapped a four-day losing streak on a heavy dose of short-covering. The index finally settled with a gain of 84 points or 0.73 per cent at 11,582.90.

The market continued to throw up mixed signals. The 50-stock pack has bounced back from 100-DMA, and this level remains the most crucial level to watch out for. The rally was solely on the back of short-covering, which was evident from the fall in net open interest.

It would be extremely crucial that the upmove, which was triggered by short-covering gets extended on the back of fresh buying. The VIX fell 8.54 per cent to 12.47, its lowest levels in the recent past.


As per technical analysis, some positive followup moves and the extension of the pullback is likely.

Friday’s session may see a muted to a mildly positive start with the levels of 11,630 and 11,685 acting as resistance. Supports may come in at 11,514 and 11,460.

The Relative Strength Index (RSI) on the daily chart stood at 41.68 and remained neutral, showing no divergence against the price. The daily MACD was bearish and traded below its signal line.

On the derivatives front, Nifty futures have shed over 10.25 lakh shares or 5.51 per cent in net open interest in July series. Shedding of open interest makes it evident that the rally was fuelled by short-covering. The Nifty PCR stands at 1.03 against 0.91 on the previous session.

The index trades oversold on a few of the key indicators on the short term charts. Further, 100-DMA, which is at 11,514 is the crucial support on a closing basis.

Nifty has taken support thrice at its 100-DMA over the past couple of months. It would be critically important that the index keeps its head above this level, and this short-covering gets replaced with fresh buying.

Until this happens, sustaining gains at higher levels would be difficult for the market. While we reiterate avoiding shorts, all profits should be protected vigilantly at higher levels.

(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)