Trade Setup: Risk-reward ratio extremely unfavourable; avoid aggressive buying

Domestic benchmark equity index Nifty went on to post yet another incremental high last week on Friday, but the fatigue at higher levels remained evident in the market.

Friday’s session saw the index inching higher as Nifty hit its fresh high in the first hour of the session. However, after that, the market retraced from its high point and remained largely range-bound for the rest of the session. After giving up most of its gains at one point, the index pulled itself back in the afternoon session. Nifty finally ended the day with a net gain of 61.60 points or 0.39 per cent.

From a technical perspective, the index is at a stage where the risk to reward ratio is extremely unfavorably placed when it comes to chasing the momentum. Unless the adequate trailing stop losses are in place and strictly adhered to, there are greater chances of one getting trapped on a wrong foot. Volatility showed a fresh decline as India VIX dipped by another 6 per cent to 14.1025.

The market is giving ample signs for traders to protect existing profits at present levels. Such low levels of VIX are indeed precarious. The longer it remains at such lower levels, greater are the chances of a violent spike in volatility.

Nifty is likely to have a soft start on Monday. The levels of 15,830 and 15,885 will act as resistance points, while support will come in at 15,700 and 15,630.

The Relative Strength Index (RSI) on the daily chart stood at 69.87; it again showed a strong bearish divergence against price. The daily MACD was bullish but the slope of the histogram showed a continued deceleration of momentum.

The pattern analysis showed that the index moved past 15,430, had a classical throwback to the breakout point, and resumed its up move. While reaching current levels, it has shown deceleration of momentum and some classical signs of fatigue and distribution as well.

The analysis for Monday stood much on the existing lines. We recommend avoiding aggressive purchases at current levels. As long as Nifty keeps inching higher, one can follow the momentum but with strict trailing stop losses in place. The emphasis from now on should be more on protection of profits at higher levels than adding to leveraged positions. While continuing to stay light on overall exposures, a cautious outlook 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)