Nifty50: Trade Setup: Nifty showing strength, but prudence calls for extra vigilance

Nifty added more gains on Tuesday as it showed robust strength for the second day in a row to end at a new lifetime high. Also, for the second day, Nifty registered gains in excess of 200 points. Global markets were subdued in the morning, and Nifty stayed resilient but subdued in the first hour of trade.

However, the index grew stronger as the day progressed and navigated the 17,000 level and moved higher. The market saw some sharp momentary profit taking midway through the day. However, the losses were limited and the index again recovered to scale new highs.

The headline index finally ended with a strong gain of 201 points, or 1.19 per cent. Nifty now stays distinctly overbought and remains very much prune to consolidation at current levels. However, the way Nifty witnessed a very short-lived profit taking and then recovered, it is a clear sign of unending strength in the market.

However, we need to keep this in mind and avoid any major shorts. While chasing the rise, regardless of its strong behaviour, it is the time for traders to turn extra-vigilant and protect profits at higher levels.

In an unusual behaviour, market’s volatility spiked; INDIA VIX shot up by 9.02 per cent to 14.5200. The 17,150 and 17,200 levels are likely to act as resistance now; while supports are likely to come in at the 17,000 and 16,950 levels. Any corrective move or consolidation is now expected to make the trading range wider.

The Relative Strength Index (RSI) on the daily chart stood at 82.49; it has marked a new 14-period high and it is bullish signal. RSI stays strongly overbought, but remains neutral and does not show any divergence against price. The daily MACD remains bullish and above the Signal Line. A strong White Body occurred on the charts; this reflects the market consensus on strong upside directional potential.

Apart from just one short-lived intraday correction that we have seen, options data showed a lot of underlying strength in the market. There was lot of Put unwiding between 16,700 and 16,800 levels. On the other hand, the 17,000 level saw large addition of Call OI. This shows in the event of any down move, the same may remain very limited in extent.

That said, given the kind of rise that we have seen, it would be prudent to now tread cautiously. Most of the ‘safe’ bounces are likely to happen in the underperforming stocks like bank and auto stocks. Where there is a strong runup, it would be prudent to keep vigilantly protecting profits at higher levels.

While staying highly alert, a stock-specific approach is advised for the day.

(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)