Trade Setup: Nifty slips into broader consolidation range; significant downside unlikely

After an unabated move for more than a week, the Indian equity markets finally saw some corrective move taking place. Following a positive start to the day, the Nifty50 saw a sharp drop of 185 points from the morning’s high point. However, until late afternoon trade, Nifty managed to recoup all these points. But in the late session, Nifty50 again faced corrective pressure and came off over 150 points. It finally settled with a net loss of 58.30 points (-0.32 per cent) over the previous close.

From the technical perspective, the second time market pared its gains and gave up its recovery is important. It has marked Tuesday’s high point of 18600 as a potential short-term top for the market. Now, over the coming days, unless the level of 18600 is taken out convincingly, Nifty50 has once again pushed itself in a broad consolidation range of 18000-18600. The options data show high Call writing taking place at all strikes between 18600-18800 levels. The level of 18600 has the highest accumulation of Call OI as per the weekly options data and this point will continue to pose resistance for the markets.

India VIX rose by 1.15 per cent to 17.3815 as volatility surged a bit. Wednesday is likely to see the levels of 18465 and 18520 acting as resistance points. The supports may come in at 18350 and 18310 levels.

The Relative Strength Index (RSI) on the daily chart is 74.58 and it remains slightly overbought. RSI is neutral as it does not show any divergence against the price. The daily MACD is bullish and above the signal line.

Nifty50 formed a large bearish engulfing candle on the daily chart. This has appeared near the high point following a strong uptrend. The occurrence of such a candle in these technical conditions hints at the formation of a probable intermediate top for the markets at the 18600 level.
Overall, looking at the present pattern analysis of the charts, it is pretty evident that the markets have taken some imminent and overdue breather and Nifty50 has pushed itself into some consolidation within a wide defined range. Having said this, it is also important to note that aggressive shorts in the market must be avoided as no major long unwinding was witnessed. It is recommended to curtail overall exposures and leveraged positions, long or short, and continue approaching the markets with a highly selective approach.

(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])