Trade Setup: Nifty vulnerable till it closes above 14,748; protect profits

Staying spooked with rising US bond yields and strengthening US dollar, headline index Nifty opened on a lower-than-expected note. It continued to relatively underperform other Asian peers as it extended its violent slide. However, after marking its low point of the day in the morning session, Nifty staged a massive over 430-point recovery from the low point of the day. The index not only recouped its losses but managed to extend a pullback and ended with a net gain of 186.15 points or 1.28 per cent.

The market is now placed at a very crucial juncture. Nifty has violated its 50-DMA on a closing basis; the present pullback has seen the index closing exactly at that point. The 50-DMA stood at 14,748. There are possibilities of a positive opening on Monday with Nifty extending its gain; however, it would be critically important for the index to move past and close above its 50-DMA. Unless that happens, it will continue to stay vulnerable to corrective bouts at higher levels. So, apart from a positive opening, maintaining gains, if any, would be crucial for the index to avoid continued weakness. Volatility continued to slide as India VIX came off by 0.46 per cent to 19.9875.

Monday’s session is likely to see a modestly positive start to the day. The levels of 14,800 and 14,875 will act as immediate resistance points, while support will come in at 14,700 and 14,635 levels.

The Relative Strength Index (RSI) on the daily chart stood neutral at 47.27 and did not show any divergence against price. The daily MACD was bearish and remained below its Signal Line. A piercing line occurred on the charts; this may signal reversal of the downtrend and some continued technical pullback on the charts.

The pattern analysis shows that Nifty has inflicted a minor structural damage on the charts. It has violated a pattern by slipping below the rising support trend line; the 50-DMA at 14,748 is seen acting as a proxy trend line for this formation. If Nifty is able to extend its technical pullback, it will face stiff resistance going ahead at 14,900-15,000 area and higher given the rising nature of this trend which may act as a resistance point.

We recommend avoiding shorts as Nifty is more likely to extend its technical pullback. However, it is also important to note that the pullback may stay very limited in its extent unless the index is able to keep its head above the 50-DMA on a closing basis. We recommend continuing to say stock specific and protect all profits, big and small, on

either side. Apart from the domestic charts setup, the market will continue to trace bond yields and the US Dollar; it is reiterated to keep exposures modest and adopt a highly cautious approach towards the market 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)