Trade Setup: 18,150 level crucial for Nifty; avoid excessively leveraged exposures

On the last day of the trading week, the Indian stock market witnessed a massive short covering led move that propelled the benchmark indices higher as it ended the day with a strong gain.

Following a positive start, headline index Nifty saw paring of its gain in the morning session. However, after that blip in the morning, the index reversed its trajectory again. It stayed in the upward rising trajectory and kept getting incrementally stronger. It not only went above past the psychologically-important 18,000 level, but also managed to stay above that point as well. While the market successfully maintained its gain, the headline index ended with a strong gain of 229.15 points or 1.28 per cent.

It is important to note that the surge that was seen on Friday was fueled solely by heavy short covering from lower levels. Short covering was evident as Nifty November month futures shed over 6.80 lakh shares or 6.32 per cent in net Open Interest. It would be extremely crucial to see if this short covering gets replaced with fresh buying; it is only built up of fresh longs that would propel the market higher. Nifty still has to nullify the potentially dangerous Head & Shoulder formation. The index will invalidate this formation only if it moves past 18,150 convincingly. With just four trading days this week, Nifty’s price behavior vis-à-vis the levels of 18,150 will be important to watch.

Volatility dropped as India VIX came off by 6.94 per cent to 15.2175. Monday’s session is likely to see the levels of 18,150 and 18,190 acting as resistance points while support will come in at 18,020 and 17,940 levels.

The Relative Strength Index (RSI) on the daily chart stood neutral at 55.60 and did not show any divergence against price. The daily MACD was bearish and below its Signal Line. However, histogram suggests that the downward momentum is diminishing and the Nifty is trying hard to put and validate supports in the present zone. Pattern analysis shows that the Head and Shoulder formation is still there; this is potentially a bearish one. However, as mentioned in our previous technical note, any formation should not be read in isolation; the neckline of this formation coincides with the important support of 50-DMA at 17,795. Unless this is taken out, no preemptive shorts should be taken. Also, this pattern will be nullified if the index moves past 18,150 levels convincingly and stays above that point.

Nifty50ETMarkets.com

In the present technical setup, we recommend avoiding any excessively leveraged exposures until the present potentially bearish formation is nullified and canceled. It is recommended to also avoid short positions so long as the Nifty is above the 50-DMA. By the time a clear directional bias is established, it would be prudent to continue staying highly stock-specific while approaching the market.

(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 )