Trade setup: After short-covering bounce, Nifty50 will hit wall at 200 DMA on Friday

In a perfectly orchestrated session, which saw the expiry of weekly options, the domestic equity market witnessed strong short covering again at lower levels. The market saw a better-than-expected start to the session, but traded in a very narrow range in a sideways trajectory. Nifty took no directional bias for most part of the day. However, the last hour of the trade saw expiry-led moves. The headline index moved past the 10,700 mark, and even after coming off slightly from the high point, it ended with net gains of 121.75 points, or 1.15 per cent.

The 10,800 level saw the highest concentration of Call open interest throughout the day. The highest Put OI shifted to 10,700 level, which ensured that the index settles between these two marks. Nifty has again faced resistance at the rising trend line pattern resistance that lies just below the 200-DMA. This showed that the 10,800-10,880 zone remains the stiffest resistance for the index.

The opening levels and the trajectory of Friday’s session would be crucial to watch. It remains to be seen if Nifty attempts to move towards the 200-DMA, which now stands at 10,872. The 10,780 and 10,835 levels will act as key resistance, while supports will come in at 10,650 and 10,570 levels.

The Relative Strength Index (RSI) on the daily chart is at 63.05. It has a neutral stance and does not show any divergence against price over the 14-day period. The bearish Failure Swing that occurred remains very much in play and the lead indicator shows a negative divergence against price for the immediate short term. The daily MACD remains bearish, as it trades above the signal line.

Pattern analysis showed Nifty trades within the broad rising channel. However, the index is likely to face resistance at the rising trend line formed within the channel and remain below the 200-DMA.
All in all, there may be a few intermittent bounces in Nifty, but for a sustainable rally to occur, the index will have to move past and close convincingly above the 200-DMA.

The 10,800-10,880 zone will continue to offer strong resistance to up-moves, if any. We recommend chasing the up-moves in a highly stock-specific manner and keep guarding profits at higher levels.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at [email protected])