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Tuesday Trade Setup: NIFTY Show Classical Warning Signs; Distribution At Current Or Higher Levels Likely

The equity markets showed first signs of jitter in the early session as it showed a violent shakeout, but ultimately recovered to end the day on a flat note. The NIFTY saw a soft start on the expected lines. However, a sharp and volatile selloff gripped the markets in the in the first hour of the trade. At one point in time, the NIFTY found itself down by over 180-odd points. However, for the remaining day, the index recovered gradually. It came off over 200-odd points from the low of the morning and managed to end flat with the negligible gains of 12.50 points (+0.08%).

Monday’s session can be taken as a yet another warning sign as the technical setup has now become precarious to say the least. The volatility has fell very near to its lowest point witnessed in early 2020; Monday saw volatility rising slightly as INDIAVIX rose by 3.95% to 14.6600. The zone of 15800-15860 now remains a crucial resistance zone for the markets; no meaningful upsides are likely if the NIFTY stays below this zone. On the other hand, any corrective moves like the one witnessed in the morning of the previous session is likely to make the trading range wider than usual.

Tuesday is likely to see a subdued start to the trade once again. The levels of 15830 and 15875 will act as resistance points. The supports come in at 15710 and 15620 levels.

The Relative Strength Index (RSI) is now 70.19 and it is in mildly overbought zone. Importantly RSI shows a fresh bearish divergence against the price. While the price action saw formation of a high, the RSI did not, and this resulted in a bearish divergence. The daily MACD is bullish and above the signal line. However, the narrowing gap of the Histogram sends clear signals of deceleration of the momentum while the NIFTY is marking incremental highs.

A classical Hanging Man emerged on the candles. This formation has occurred near the high point hold a potential to disrupt the current uptrend. It also has a potential to mark a temporary top for the markets; however, all this would require confirmation on the next trading day.

All in all, the risk-reward ratio in the markets remain extremely skewed. This has become unfavorable to the extent that we strongly recommend avoiding all fresh purchases altogether; sole focus for next few days should be to vigilantly protect profits on the long positions at current or higher levels. The volatility has risen only marginally; however, it has given enough advance warning that if a corrective move happens, it can be intense and quite damaging to small retail traders. We recommend staying away from creating leveraged exposures and continue approaching the markets with a high degree of caution.

This was first published by The Economic Times.

Milan Vaishnav, CMT, MSTA
Consulting Technical Analyst
Member: (CMT Association, USA | CSTA, Canada | STA, UK)  | (Research  Analyst, SEBI Reg. No. INH000003341)

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