Trade Setup: Nifty creates firm support above 16K, avoid shorts for now

Following a strong consolidation for over two months, Nifty finally broke out of the broad consolidation zone and ended the day on a very strong note. The market opened on a positive note. However, it traded in a capped zone in the first hour of trade. After that, the market just grew stronger. After maintaining steady gains near the key resistance area, the index saw a sharp incremental move on the higher side and went past the 16,150 level. While maintaining gains with good market breadth, Nifty ended with strong gains of 245 points (+1.55 per cent).

Tuesday’s session has been very significant from the technical perspective. Nifty has taken out the resistance in the 15,900-15,950 zone after wrestling with it for eight weeks. This resistance, since it is taken out convincingly, has now become an immediate support zone for the index. This means so long as Nifty keeps its head above the 15,900-15,950 zone, the breakout will remain valid and in force.

Volatility has seen a spike. INDIA VIX rose by 7.36 per cent to 13.7475. On Wednesday, Nifty is likely to see 16,200 and 16,245 levels act as resistance; since the 50-pack is now in the uncharted territory, resistance levels are judged using the options data.

Supports on the lower side may come at 16,030 and 15,950 levels. The Relative Strength Index on the daily chart stood at 65.93; it has marked a new 14-period high, which is a bullish signal. The RSI, however, remains neutral and does not show any divergence against the price. The daily MACD has shown a positive crossover; it is now bullish and trades above the signal line.

A rising window has occurred. Further to this, it is not only a gap, but a breakaway gap. Such patterns get mostly resolved in the direction of the move.
Pattern analysis shows Nifty is breaking out of a two-month-long consolidation. This has made the resistance area at 15,900-15,900 as its most immediate support, if the market consolidates once again in the near term.

All in all, given the strength of the breakout, it is unlikely that the market may see any immediate corrective move. However, if the current breakout is read in conjunction with the longer-term weekly charts, Nifty has halted just near its resistance level that exits in form of a rising trend line.

In the given technical structure on the daily and the weekly charts, we recommend doing two things. First, looking at the strength of the breakout on the daily charts, shorts should be best avoided. Fresh purchases should be kept focused on defensive stocks and largely within the large caps and frontline stocks while maintaining a cautiously positive outlook for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of EquityResearch.asia and ChartWizard.ae and is based at Vadodara. He can be reached at [email protected])