Trade Setup: Nifty may post incremental highs; avoid high beta stocks

The domestic equity market ended yet another session with gains as it continued to post up moves in an unabated manner following strong liquidity inflows.

Headline index Nifty had a modestly gap-up opening. However, the morning session saw some minor intermittent profit taking bouts. The market, in general, refused to give up and went on to pile slow but steady incremental gains in the second half of the day. It marked the day’s high in late afternoon trade, while it oscillated within a narrow 100-point range. These gains were maintained until the end of the session as Nifty closed with a net upside of 137.50

points or 0.96 per cent.

The market is now presenting a contradictory picture. On one hand, derivatives data shows an immensely strong undercurrent and on the other hand, the structure of the charts stay highly overstretched.

The previous session saw high Put writing at 14,400. On the other side, maximum Call OI shifted to 14,800 levels. The NIFTY PCR (all expiries) stayed very strong at 1.80, but at the same time, it is overbought. Given the current technical setup, the market may post some incremental highs, but volatility and profit taking bouts will also increase along with this.

Tuesday’s session may have a quiet start to the day. The levels of 14,525 and 14,630 will act as immediate resistance points, while support will come in at 14,400 and 14,365 levels.

The Relative Strength Index (RSI) on the daily chart is 79.73; it stays overbought and reflects a bearish divergence against price. The daily MACD is bullish as it stays above the Signal Line. A rising window occurred on the charts. This occurs out of a gap on the upside and usually resolves with a continuation of the uptrend. However, this will need confirmation on the next trading session.

Volatility, as reflected in India VIX, surged by 8.44 per cent to 22.3875. Amid the present technical setup, we recommend avoiding all high beta stocks and those that have run up too hard. With the market not giving up and with the corrections, if any, remaining short-lived and intermittent, shorts too should be avoided. All purchases should be kept highly stock-specific and focused on the stocks which are defensive, low beta and who have started to improve its relative strength following some consolidation. A highly cautious chase of momentum is advised.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)