Nifty: Trade Setup: Nifty50 remains in consolidation; crucial to stay above 50-DMA

On yet another sluggish day, Nifty50 ended on a negative note despite staying resilient for most of the day. Following weak global cues, the markets opened lower; however, it soon managed to crawl into the positive territory as it showed resilience. Nifty50 marked its high point when it briefly climbed into the positive territory. After that, the headline index slipped into the negative zone again but remained in a defined and narrow trajectory. Weakness intensified in the last hour and a half of the trade. The benchmark index finally ended with a net loss of 100.55 points (-0.56 per cent).

We enter the expiry of weekly options on Thursday; it will also be the last day of the trading week as Friday will be a trading holiday on the account of Gurunanak Jayanti. The present technical structure also continues to stay precarious for the near term as Nifty50 is dealing with a potential bearish Head & Shoulders pattern. Nifty50 will remain prone to this pattern’s bearish implications until and unless it moves past 18150 convincingly. It is also important to note that the neckline of this formation coincides with the 50-DMA which presently stands at 17842. Therefore, staying above 17850 on a closing basis will be crucial for Nifty50 to avoid any extended weakness.

Thursday is expected to see the levels of 17950 and 18090 acting as potential resistance points. The supports come in at 17850 and 17780 levels.

The Relative Strength Index (RSI) on the daily chart is at 48.38; it is neutral and does not show any divergence against the price. The daily MACD is bearish and below the signal line. Nifty50 formed a candle with a long upper shadow on the daily chart. Usually, this kind of candle has bearish implications, but since this has occurred following a downtrend and near a potential support area, it should be ignored and not interpreted in isolation.

All and all, Nifty50 is still trapped within a potentially bearish Head & Shoulders and for Nifty50 to avoid any weakness, it will have to keep its head above the 50-DMA which also coincides with the neckline of the present pattern and stands at 17842. The options data suggest the highest Call OI accumulation at 18200 followed by 18000 levels. This means that if Nifty50 sees a strong opening and stays above 18000-level, it can invite some short covering from lower levels. In any case, we recommend staying away from creating any aggressive positions, long or short, until a directional bias on either side is established. A cautious outlook is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae (ChartWizard, FZE) and is based at Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)