Trade Setup: 15,300 inflection point for Nifty; stay away from high beta stocks

In yesterday’s technical note, the level of 15,200 was mentioned as a crucial level to watch out for Nifty. It was expected that if the headline equity index was able to move past that level, it could pile up some incremental gains.

Monday’s session had the index opening above that level with a modest gap up. Most part of the day was spent in maintaining these gains. It got stronger as the day progressed, and the headline index finally ended with a net gain of 151.40 points or 1 per cent. Banking and financial stocks dominated the uptrend with all top gainers in the Nifty50 pack being from the banking and financial services universe.

Nifty now stands at a precarious level. This is reflected in the options data. The 25 Feb expiry saw maximum Call and Put writing and OI addition at 15,300 levels. Market participants are treating this level as an inflection point, apart from short-term immediate jerks. For the current week, 15,200 and 15,500 continued to hold maximum Put and Call OI, respectively. We will see Nifty oscillating in these levels going ahead from here with much increased amount of volatility. Another matter of concern is the entire financial group, be it most of the private banks, PSUs, or a few financial services stocks, are moving higher with continued bearish divergence on their lead indicators.

We will not have any overnight cues to deal with on Tuesday as the US market is shut on observance of President’s Day. Tuesday’s session may see the level of 15,350 and 15,465 acting as resistance, while support will come in at 15,200 and 15,050 levels.

The daily RSI stood at 71.45; it not only entered the overbought zone but also showed a strong bearish divergence against price. The daily MACD was bullish and traded above its Signal Line. A rising window occurred on the charts. This usually results in continuation of an uptrend, but this cannot be read in isolation. If we read this formation along with the other evidence present on the chart, it would badly need a confirmation on the next trading day.

Volatility declined as India VIX came off by 2.57 per cent to 21.4750. Overall, the market is now extremely overstretched to the extent of getting unhealthy. If the current upmove must sustain in a healthy way, some corrective consolidation stands imminent. Also, it is important to bear in mind that such relentless and near-vertical upmove can lead to equally or even more violent corrective moves. We recommend to completely stay away from all high beta stocks now and use each up move only for protecting profits and taking money off the table. Defensives took a back seat; this often happens when high beta stocks are being chased. We recommend continuing to limit purchases to only defensive stocks even if they show up relative underperformance in the immediate short-term to protect from any expected volatile corrective moves.

(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)