Trade Setup: Signs of trend shift as Nifty heads for weekly expiry

A spurt in the broader market, especially in midcap stocks, and an extension of the rally in the financial group, helped Nifty extend its gains to a fresh high point on Wednesday. Nifty had a soft start on the expected lines and after trading in a limited range, marked its low point in the morning trade.

After that, Nifty moved in the sideways trajectory for most part of the day. Just when it looked like the market was about to see some kind of a corrective move, short covering emerged in the last hour and a half. Nifty rebounded over 100 points from the low point. While staying near its high point, the headline index ended the day 64.05 points, or 0.50 per cent, higher.

The surge seen in the last hour-and-a-half was due to short covering at lower levels. This was evident as the premium in Nifty futures increased and the bounce came with a net drop in Open Interest in future contracts. The expiry of weekly options is due on Thursday. As of now, despite the surge, the 13,000 level on the Nifty continues to see highest accumulation of Call Open Interest. Unless this level is taken out convincingly, Nifty is likely to take some breather near this point.


However, any forceful move in Nifty beyond the 13,000 level will bring some incremental upsides, though this seems unlikely. On Thursday, the 13,000 and 13,030 levels are likely to act as key resistance points, while supports will come in much lower at 12,860 and 12,730 levels.

The Relative Strength Index (RSI) on the daily chart stood at 78.66. It has made a fresh 14-period high, which is a bullish indication. The RSI remains neutral and does not show any divergence against the price. The daily MACD remains bullish and rules above the signal line.

A Bullish Engulfing Candle has occurred. However, this cannot be considered a valid Bullish Engulfing pattern as it has occurred during a steep uptrend. On the contrary, it can act as a potential reversal point and may point towards the formation of a temporary top. This will need confirmation on the following day.

All in all, the market continued to be fuelled by liquidity. In the process, it has got highly overstretched. We reiterate the need to continue approaching the market with utmost caution. This is definitely not the time to make any fresh entry in high-beta and other financial stocks. One needs to keep fresh purchase limited to defensives and protect profit at current 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)