Trade Setup: Any Nifty dip to get bought into; stop losses a must

In a very resilient show, the Indian equity market on Friday recovered from the low point of the day to end with minor losses. Nifty saw a negative opening and traded with modest losses in initial trade. After a rangebound move, the market turned weaker as the index plunged. Just when it seemed like the market may end with a sharp correction, a sharp short-covering rally pulled Nifty higher. At one point in time, the headline index managed to recover nearly all its losses. It finally ended with just a minor loss of 21.30 points, or 0.19 per cent.

The market is showing strong resilience to even modest declines. The discomfort is so much evident with even a small decline that it leads to short covering at lower levels.

Even Friday’s pullback can be attributed to short covering, as it came with a sharp drop in cumulative Open Interest. Going ahead, some rangebound consolidation cannot be ruled out even as the market attempts to test the upper edge of the rising channel. Volatility declined modestly as India VIX came off 0.43 per cent to 24.5350 level.

Monday’s session may see a steady start. The 11,245 and 11,290 levels will act as key resistance, while supports will come in at 11,100 and 11,000 levels.

The Relative Strength Index or RSI on the daily chart stood at 71.73. It remains neutral and does not show any divergence against price. The daily MACD remains bullish as it trades above the signal line. Apart from a small white body that emerged on the candle, no other significant formations were seen.

Pattern analysis showed Nifty is showing strong resilience to any corrective activity even at current levels. Currently, the index trades above all its key moving averages, and it is placed near the upper edge of the rising channel where it is trading in.

All and all, the narrowing of the trading range can be interpreted either way. In the current technical setup, it should not come as a surprise if Nifty shows some sharp bout of profit taking. However, given the current structure, there are no signs of any major downside and corrective moves. If there is any, it is likely to get bought into. There are higher chances of Nifty attempting to test the upper edge of the rising channel. However, in the same breath, we recommend following the up-moves while strict trailing stop losses 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])