Trade setup: Short covering-fuelled rally leaves Nifty in precarious state
We recommend remaining vigilant and protecting profits at higher levels.
The market opened on a tepid note, as anticipated, and traded in a capped range while moving in and out of the negative territory. However, afternoon trade saw Nifty in an upward trajectory as the index witnessed an almost linear move on the upside. This took the markets higher, and Nifty closed the day, posting a decent gain of 122.35 points, or 1.07 per cent.
The market is once again positioned in a precarious condition. The rallies that we witnessed over the past couple of days have come purely on account of short covering, as is evident from the consistent decline in open interest. This is a cause of concern, more so when Nifty is just short of being mildly overbought.
Lead indicators show a bearish divergence pointing towards the possibility of exhaustion at higher levels. We have an extended weekend once again, as Monday is a trading holiday on the bourses on account of assembly elections in Maharashtra.
Friday may see a stable start to trade, but the possibility of the market encountering substantial overhead resistance cannot be ruled out. On Friday, Nifty is likely to see the 11,610 and 11,675 levels act as key resistance while supports will come in lower at 11,510 and 11,450. In the event of any corrective move, the trading range may get wider than usual.
The Relative Strength Index (RSI) on the daily chart stood at 61.7277. It has shown a bearish divergence against price. Nifty has set a new 14-period high, while the RSI has not. The daily MACD stays bullish even as it trades above its signal line.
The market may open stable and attempt to inch higher in initial trade. However, we recommend approaching the market with a high degree of caution. There are possibilities that the mood may turn cautious in the latter half of the day owing to the extended weekend. The up-move in the market, which has been solely because of short covering at lower levels, cannot be construed to be healthy.
If Nifty has to built up on this strength, it will be crucial for the short covering to get replaced by fresh buying. If Nifty continues to post gains, the up-move should be chased very selectively and cautiously. We recommend remaining vigilant and protecting profits at higher levels.
Milan Vaishnav, CMT, MSTA, is a Consultant Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at firstname.lastname@example.org