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Trade setup: Nifty50’s risk-reward skewed, don’t chase this up-move

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The gush of liquidity continued to chase the equities and helped Indian indices close with gains for the sixth day in a row. The market opened positive and Nifty continued to trade with strong gains for most part of the session, oscillating in a defined range and maintaining gains.

The last hour-and-a-half of the session saw some sharp profit taking at higher levels. While Bank Nifty came off over 1,000 points, Nifty pared over 150 points from the high point of the day. After some modest recovery from the low point, Nifty managed to end the day with a gain of 82.45 points, or 0.83 per cent.

The sixth day’s gain was different from that previous five days. For the first time, Nifty showed clear signs of exhaustion and an inclination towards profit taking as we had indicted in the previous note. That said, the weekly options expiry will influence trade on Thursday.

The 10,000 level has maximum concentration of Put open interest, and Nifty’s behaviour against this price level will be crucial to watch out over the coming days. Volatility index INDIA VIX showed a marginal decline of 0.24 per cent to 30.0425.

In Thursday’s session, Nifty is likely to see the 10,095 and 10,115 levels act as key resistance, while supports will come in at 9,965 and 9,855 levels.

ET CONTRIBUTORS

The Relative Strength Index (RSI) on the daily chart stood at 67.24. It once again marked a fresh 14-period high, which is a bullish indication. The RSI remained neutral and did not show any divergence against price. The daily MACD remained bullish. It traded above the signal line.

On candles, a classic Shooting Star occurred. Such a candle formation emerges when the index opens with a gap, gets stronger, but eventually comes off to end near the low point. This is a potential reversal pattern and may temporarily halt the current up-move. This will require confirmation on the next trading bar.

All in all, our analysis continues to remain on the same lines as the previous day. We reiterate that up-moves from now on should not be chased unless there is some consolidation in the defined range. Chasing of momentum in the current market is making the risk-reward extremely skewed. The high of the earlier session, i.e. 10,176, can establish itself as a temporary resistance point. Given this setup, the 10,175-10,200 range would potentially present itself as a very strong overhead resistance zone. A cautious outlook is advised for the day.

(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])

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