Trade Setup: Nifty's trading range expected to be wider than usual; stick to low-beta defensives

Following a steep cut in the earlier session, the domestic equity market recovered on Tuesday, more so in the second half of the session to end the day with a strong gain.

Headline index Nifty started on a quiet note on anticipated lines. However, it stayed range bound until afternoon and did not make any major directional headway. However, the afternoon trade saw some heavy short covering ahead of the market holiday which took the index to a new intraday high. Following this move, Nifty ended on a strong note piling up gains of 194 points or 1.36 per cent.

From a technical perspective, the index has bounced off from its 100-DMA at 14,282. This support has been held on a closing basis as of now. On the other hand, there is also a gap created between 14,650-14,850 levels due to the strong corrective move. However, this gap is an area gap as this occurred within the falling channel that the index was in. This makes this gap insignificant in nature, being an area gap.

The market is likely to open on a strong note after the holiday. The index is likely to see the levels of 14,590 and 14,650 act as resistance points, while support will come in at 14,350 and 14,280 levels. The trading range for the day is expected to stay wider than usual.

The Relative Strength Index (RSI) on the daily chart stood neutral at 45.12 and did not show any divergence against price. The daily MACD was bearish and remained below its Signal Line.

The gains that were seen in the previous session were because of short covering; this was evident as Nifty April futures reported a reduction in Net Open Interest by over 2.23 lakh shares or 1.99 per cent. It would be important to see if this gets replaced with fresh buying. However, with Nifty still well within the falling channel, all up moves will continue to find selling pressure at higher levels.

Another important thing to take care of as we approach the market is not getting carried away with the rally in the stocks that are generally favored during the risk-on setup. The previous session’s rally had nearly all the economy-facing stocks performing strongly. However, given the current market setup, it would be prudent to stay with low-beta defensive stocks while continuing to guard profits on either side. Unless the present channel formation is resolved with a directional cue on either sides, it would be wise to also keep overall exposures at modest levels.

(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)