Nifty: Trade Setup: Chase market momentum cautiously; protect profit at higher level

In the previous note, we had observed that the short covering from the lower levels that led to a recovery of the market on Wednesday is a good sign, as market participants are not comfortable staying short at lower levels. The market traded much on the expected lines on Thursday, as it managed to resume its bounce after six days of consolidation.

The market opened on a positive note and Nifty only grew stronger as the day progressed. The index marked its intraday high point in the late afternoon trade. The headline index closed at a fresh high with gains of 82.15 points (+0.50 per cent).

As long as Nifty is able to keep its head above 16,300 level, there are higher chances of the index testing the 16,500 level. The weekly options expiry remains less volatile; strike prices at 16,200 and 16,300 went on to see high Put writing and this helped the index settle above this point.

There are high possibilities of Nifty inching higher if the index stays above 16,300 level. As it was evident, a decline in volatility and INDIA VIX came off 2.64 per cent to 12.3725. Friday’s session may see a stable start to the day. The 16,390 and 16,500 levels will act as immediate resistance points, while supports are expected to come in at 16,300 and 16,230 levels.

The Relative Strength Index(RSI) on the daily chart stood at 71.01; it shows a mild bearish divergence against the price. The RSI, however, is now in mildly overbought zone. The daily MACD remains bullish above the Signal Line. A white body occurred; apart from this no other formation was noticed on the candles.
Pattern analysis showed Nifty initially broke out of the 15,900-15,950 zone and marked a new high. It then consolidated in a sideways trajectory for six sessions and has shown intentions of resuming its move on the upside.

From a technical perspective, another thing that looked as a strong support of the current move was the improvement in the market breadth. The bounce seen in the previous session has come with relatively much better and stronger market breadth. Bank Nifty has of late underperformed Nifty; this index is largely expected to play a catch up if the current rally sustains. Apart from this, IT stocks are also likely to perform better than the broader market.

We recommend cautiously chasing the momentum while trailing stop losses to protect profits at higher levels.

(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 milan.vaishnav@equityresearch.asia)