Trade Setup: Market not showing any sign of correction; avoid shorts

While trading much on the anticipated lines, Nifty consolidated near the all important 18,000 mark and also continued to show strong internal strength, as it ended the day on a positive note. Given the kind of weak trade setup that Nifty had inherited, the domestic market opened on a highly resilient note. Nifty opened on a flat note and oscillated in a narrow range in the first hour of trade. However, it slipped into the negative territory by afternoon. The second half of the session saw the market stage a remarkable recovery; Nifty rebounded over 150 points from the low point. The headline index finally ended at a new closing high with a gain of 46 points (+0.26 per cent).

As we approach the penultimate day of the expiry of weekly options, data continued to offer interesting insights. The 17,900 level saw continued Put writing while strike price 18,000 saw some Call unwinding. This means in the event of consolidation, the 17,900 level can well end up offering good support. On the other side, it also appears that unless there are any major negatives or corrective moves to deal with, Nifty stands a good chance of staging a breakout once again and move past the 18,000 level.

India VIX edged lower by 1.48 per cent to 15.8475. Nifty may see a flat to positive start to the day. Wednesday’s session is likely to see the 18,020 and 18,135 levels act as immediate resistance points. Support should come in at 17,935 and 17,900 levels.

The Relative Strength Index (RSI) on the daily chart stood at 68.17; it continued to show a mild negative divergence against price. The daily MACD stayed bearish and remained below the Signal Line. The narrowing slope of Histograms showed the possibility of this indicator showing a positive crossover in the coming days.

The markets stayed highly selective on the expected lines. Much on the expected lines the select banks, PSE stocks and auto stocks continued to improve their relative strength against the broader market. Similar kind of show is expected from the market through the rest of the week as well.
As mentioned in the previous weekly note, there are no sign of any impending correction happening in the market. Under the given technical setup, we recommend avoiding shorts completely. All new purchases should be kept highly stock/sector- specific. We expect majority of the sectors to improve their relative performance against the broader market. 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 and is based at Vadodara. He can be reached at [email protected])