Trade Setup: Correction overdue for Nifty; avoid high beta exposures

In a highly controlled and orchestrated session, the domestic equity market danced to the weekly options expiry setup and ended up with a modest gain. Most Asian markets were closed, while Hong Kong traded for half day which kept overall volumes on the lower side.

After a resilient opening, headline index Nifty soon crawled inside the positive zone in the morning session. After that, a majority of the session was spent within a defined range. The last hour and a half of the trade saw some expiry related moves. This had Nifty ending the day with a modest gain of 66.80 points or 0.44 per cent.

The weekly options expiry influenced the trade setup entirely on Thursday. Large Call unwinding at 15,100 level saw the index moving above this point. High amount of Put writing at 15,150 ensured that the index ended above this level. On the other hand, the maximum call OI stayed concentrated at 15,200. As mentioned in yesterday’s technical note, this level acted as a resistance and kept Nifty below this point.

Nifty would have ended flat once again, but for Reliance which contributed over 63 points out the 66.8-point gain.

Volatility declined as India VIX came off by 3.78 per cent to 23.0450. The levels of 15,200 and 15,265 will act as resistance, while support will come in lower at 15,100 and 15,000 levels.

The daily RSI stood at 69.23; it showed a bearish divergence against price. The daily MACD remained bullish as it traded above its Signal Line. A small bullish engulfing candle emerged on the charts. The candle has engulfed a small real body of the previous candle. However, bullish engulfing candles occurring at higher levels following a rise do

not have bullish interpretations and they are not same as the ones occurring at lower levels following a decline. On the contrary, they often signal reversal from higher levels, though they require confirmation on the next trading bar.

The overall market breadth continues to remain a concern. The cumulative market breadth in the form of advance-decline showed a mild negative divergence. Sectoral rotation in favor of traditionally defensive stocks continued on the expected lines. Nifty now stays overdue for at least a modest corrective move after a strong runup over the previous days. We recommend staying away from large leveraged positions and avoiding high beta exposure while maintaining a overly cautious outlook for the day.

(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)