trade setup: Trade Setup: Avoid shorts and stay invested in high quality relatively strong stocks

What seemed as a perfect rebound for the markets turned into a consolidation day as the Nifty gave up all its gains to end the day on a flat note. The market opened positive and got stronger as the day progressed. It managed to maintain gains until half of the session after which a strong corrective wave followed. The Nifty not only gave up all its gains towards the end of the session but also slipped mildly in the negative territory. After coming off over 275-points from the day’s high, the headline index closed with a negligible loss of 8.20 points (-0.05%).

The coming off of the Nifty from its high point has resulted in creation of fresh shorts in the system. This is evident as along with the decline, the Nifty February futures have added over 2.99 lakh shares or 2.91% in net Open Interest. Apart from this, with the maximum Call OI at 17500, there is clearly room for the markets to inch higher to the levels of 16,900-17,000 staying defended on a closing basis. The global markets have rebounded Friday night and Nifty will stand to benefit at least in the initial trade as we step into the new week.

Given the positive turnaround in the global trade setup, the market may see a positive start to the day. The levels of 17,250 and 17,385 may act as immediate resistance levels. The supports come in at 17,000 and 16,900 levels.

The Relative Strength Index (RSI) on the daily chart is 37.09; it is neutral and does not show any divergence against the price. The MACD is bearish and trades below the signal line.

PThe pattern analysis shows that Nifty has again taken support at a falling trend line. This trend line begins from the high of 18,600 and joins the immediate subsequent lower tops. In the event of any major weakness in the markets, it would be extremely crucial for Nifty to defend the most recent low of 16,400 levels.

All in all, we will also see some build up as we approach the Union Budget on Tuesday. We recommend avoiding shorts and staying invested in high quality relatively strong stocks. The broader markets are likely to outperform and we will see some risk-on setup playing out in the markets. This may cause the metals, financial, and the banking stocks to relatively outperform along with select auto and PSE stocks. While staying light on overall exposure, a cautiously positive outlook is advised for the day.

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 [email protected]