Trade Setup: Strong chances of markets consolidating at current levels

After three days of strong gains, Tuesday saw the markets consolidate with positive bias as they ended the day with a modest cut. The markets saw a bit weaker-than-expected start to the day. However, after opening on a negative note, the Nifty recovered from the opening lows and by afternoon, it recouped all its opening losses and went into the positive zone. The markets witnessed a sideways move until late afternoon and the last hour of the session saw them giving up and seeing some selling pressure again. The Nifty closed the day with a net loss of 76.85 points (-0.46%).

In the session before the previous one, the Nifty had seen a breakaway gap. Usually, it was expected to continue with the move given the fact that such technical setups resolve with the continuation of the up move.

Instead, the markets consolidated in a capped range. The index has formed a near similar top, i.e, 16,690 compared to 16,695 in the previous session. This has converted the level of 16,700 into an immediate resistance point for the index. For any sustainable extension of the up move to happen, moving past 16,700 will be crucial and moving past this level comprehensively will open up some more upside for the markets.

Wednesday is likely to see the levels of 16,650 and 17,735 acting as potential resistance points. The supports come in at 16,500 and 16,430.

The Relative Strength Index (RSI) on the daily chart is 52.45. It stays neutral and does not show any divergence against the price. The daily MACD is bullish and trades above the signal line.

A spinning top emerged on the candles -- such candles tend to have a small real body and display the tentative behavior of the market participants. There is also a Harami pattern seen as the present real body is completely engulfed by the body of the prior candle.

All in all, there are strong chances of the markets consolidating at current levels. However, the immediate technical structure remains strong and buoyant. So long as the Nifty is above 16,400, shorts must be avoided and all dips must be used to make select purchases at lower levels.

It is strongly recommended that while avoiding shorts, stock-picking too should be done on a highly selective note. While staying stock-specific in approach, a cautiously positive outlook is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)