What’s up ahead: Nifty nearing a double top; stay guarded for now

By Milan Vaishnav, CMT

Domestic equities had an eventful session on Wednesday as the Nifty50 came very near to its 52-week high of 8,968 level, while forming an intraday high of 8,960. There was increased volatility as the index witnessed bouts of profit taking very much on the expected lines.

Currently, the Nifty trades near a double-top resistance area and there will be continuous consolidation with increased volatility. This corrective activity in form of rangebound consolidation will be required for the Nifty to continue with its upward move.

We expect the market to see a tepid start on Thursday and the 8,960-8,975 levels will be critically important to watch out. As long as the Nifty trades below these levels, volatile oscillations will continue.

The Nifty would have ended with losses on Wednesday if not for Reliance Industries, which single-handedly contributed 54 points to Nifty gains.



For Thursday, the 8,960 and 8,995 levels will be critical resistance points. Supports can come in much lower at 8,865 and 8,810 levels.
The Relative Strength Index, or RSI, on the daily chart stood at 74.2911 and it continues to display signs of exhaustion. It trades in the ‘overbought’ territory. While the Nifty has made a fresh 14-period high, the RSI has not, and this has resulted in a bearish divergence. On the other hand, the daily MACD has reported a positive crossover and it is now bullish while trading above its signal line.

On the candlestick charts, a Spinning Top has occurred. This often reflects indecision among market participants. The derivative segment continued to saw increased rollovers. Nifty February series saw shedding of 28.31 lakh shares or 17.40 per cent in Open Interest while the March series added over 36.84 lakh shares or 31.56 per cent in Open Interest.

There has been net addition in total open interest.

Pattern analysis clearly shows the Nifty is approaching a double top formation and it is beyond doubt that this will act as major pattern resistance for the market. Every time the Nifty50 approaches this zone, it will remain vulnerable to volatile movements and bouts of profit taking.

However, it is also important to note that there has been divergence in lead indicators. This means although the market may consolidate, it is clearly showing that a good amount of steam left in it.

As of now, given the structure of the charts and F&O data read along with lead indicators, we feel the overall upward trend is likely to persist. We will see the indices scale higher levels, but at the same time they will not be without volatile oscillations and bouts of profit taking.

In a broader scenario, we advise remaining light on overall positions and making select purchases on declines. Expiry too will dominate. Also, today is the last trading day of the week, which may keep the level of caution somewhat high.