Trade Setup: Trade Setup: Shorts must be avoided; cautiously positive approach advised

It was practically the third day of consolidation for the Indian equity markets, where they traded in a defined range to end the day on a flat note. The Nifty saw a negative start to the day. It attempted to recover from the opening lows in the first hour of the trade but continued facing selling pressure as it drifted lower again. However, it spent the remainder of the session trying to recover from the lower levels. By late afternoon, the Nifty managed to recoup its losses and went to the positive territory.

By the end of the session, it ended the day flat with a negligible loss of 2.05 points (-0.01%). As we step into a new week, the technical setup gets a bit tricky in the coming days.

From a technical perspective, the markets remain structurally buoyant. It makes no sense or has given no signals that would justify the creation of shorts. On the other hand, it has gotten a bit overstretched and remains prone to consolidation. If the consolidation happens, it is likely to be with very limited downsides and a highly ranged one. Going ahead from there, the levels of 18,200 will be the crucial levels that would influence the trend for the day. This level has not only seen high Call and Put writing, but it has also seen the highest accumulation of the highest Put and Call Open interest for this weeks options expiry.

Monday is likely to see the levels of 18,300 and 18,390 acting as immediate resistance levels. The supports come in at 18,200 and 18,110.

The Relative Strength Index (RSI) on the daily chart is 69.22. It remains neutral and does not show any divergence against the price. The daily MACD is bullish and trades above the signal line.

Looking at the pattern analysis, the Nifty is seen resisting the extended trend line. This trend line is the neckline of the bearish Head & Shoulders that the Nifty had formed earlier. Given the slightly rising nature of this trend line, the resistance levels are shifting a bit higher every day.

All in all, Nifty’s price action against the levels of 18,200 will be crucial to watch. If the markets can stay above this point for long, we will see incremental gains coming in. In the same way, if the Nifty slips below 18,200, we will see the markets slipping into some ranged consolidation. It is reiterated that shorts must be avoided. There are no signals that hint at any major downsides. However, given the overextended nature of the markets, all up moves must be utilized to book and protect profits rather than getting aggressive to make fresh purchases. A cautiously positive approach 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])