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Tuesday Trade Setup: Overstretched Technicals Take Its Toll; This Is What It Can Do To The NIFTY

In a terribly volatile session, the NIFTY made a strong corrective move as it opened high but ended with a deep cut. The markets opened on a positive note and got stronger as the day progressed. After testing a high of 11794.25, the NIFTY witnessed a massive corrective move and came off over 468 points from the high point of the day. During the day, it made a few feeble attempts to bounce back without any success. While showing no meaningful recovery until the end, the headline index took a heavy cut and ended the day with a net loss of 260.10 points (-2.23%).

Markets had risen too fact detaching itself from the macro economic picture. We have been highlighting this fact many times in the past editions of the technical notes. However, on Monday, NIFTY found all the reasons ranging from SEBI not extending the deadline for new margin rules, geopolitical tensions between India and China, awfully bad GDP numbers that were expected, and more. Not only did the markets came down heavily, the volatility also spiked. The INDIAVIX surged 24.46% to 22.8350. NIFTY remained detached from the other global markets.

Tuesday may see a shaky start to the day. The levels of 11450 and 11530 will act as resistance points. Supports exists at 11310 and 11265.

The Relative Strength Index (RSI) on the daily chart is 55.65; it has crossed below 70 from an overbought territory. It stays neutral and does not show any divergence against the price. The daily MACD has turned a negative crossover; it is now bearish and trades below its signal line. A large black engulfing bearish candle has occurred. This has marked the levels of 11800 a temporary top for the markets.

In the previous note, we had mentioned about the NIFTY shifting the supports higher to 11430-11500 zones. These levels have come into picture much sooner than expected. 
Some incremental weakness cannot be ruled out at the start of the session as Monday’s trade saw some serious long unwinding. This was reflected in the F&O data which showed NIFTY futures shedding a massive 10.07 lakh shares or 8.25% in net Open Interest.

It is now super critical for NIFTY to stay above the 11450 levels to avoid any incremental weakness. The rise of previous 1000-odd points has come with severe bearish divergence or RSI as evident from the chart. Monday’s session has pushed the markets in a broad consolidation phase and no sustainable up moves should be expected apart from sporadic short-covering bouts at intermittent intervals. We recommend avoiding aggressive positions on either side while approaching the markets on a very cautious note.

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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