Trade setup: Stay selective, avoid building large leveraged positions on either side

The fourth and the last trading day of the week remained under corrective pressure as the markets ended the day with a loss, while violating a few crucial support levels. The Nifty opened on a modestly positive note; however, that led the markets to mark its intraday high point in the very early minutes of the trade after which the index slipped in the negative territory. Markets continued to gradually slid until the middle of the session; the second half though, was spent in trying to attempt modest recoveries. NIFTY recovered over 75-points from the day’s low point. The headline index finally ended with a net loss of 133.85 points (-0.75%).

From the technical perspective, the Nifty has violated the neckline of the bearish Head & Shoulders pattern; in the process, it has also slipped and closed below the 50-DMA which coincided with that neckline. The 50-DMA stands at 17,850. Therefore, unless the Nifty moves above this 50-DMA, this point will act as the near-term resistance for the markets. The market breadth continued to remain weak; in the event of any possible technical pullback, the health of the market breadth will need to be closely watched. As of now, unless the Nifty moves back above 17850, it will continue to trade weak with a corrective undertone.

Volatility continued to decline; India VIX came off by 0.82% to 14.8575. For Monday, NIFTY is likely to face resistance at 17840 and 17900 levels. Supports come in at 17700 and 17665.

The Relative Strength Index (RSI) on the daily chart is 44.20; it shows a mild bearish divergence against the price. The daily MACD is bearish and trades below the signal line. Apart from a black body that emerged on the candles, no other formations were noticed on the charts.

The pattern analysis shows the index slipping below the neckline of the Head & Shoulders formations and also slipping below the 50-DMA which coincided ith the neckline. So, unless the Nifty moves back above 17850, it will continue finding resistance at this point.

However, rather than being overtly bearish by building excessively leveraged positions, two important points need to be noted. First, the Head & Shoulders formation is visible on the daily timeframe as they have emerged over a short time. Secondly, the global markets are not as weak as we are and perhaps there is just a temporary divergence that may get corrected going ahead. So reading the domestic technical setup along with the overall global trade setup, it is recommended avoiding building any large leveraged positions on either side. It is also recommended to continue staying selective,

light on positions, and making use of any corrective moves to make select buying in those stocks whose Relative Strength continues to improve against the broader markets.

(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].)