Monday Trade Setup: Volatility May Show Up; Chasing Vertical Hysterical Moves May Be Dangerous
What the markets got on Friday morning from the Finance Minister was manifold more that it ever hoped for. In what is touted as one of the boldest reforms of the recent past, the Government went on to lower the corporate tax rate along with other announcements. The markets on Friday had opened flat and had traded in a narrow range in the first hour and half of the trade. However, the announcements invited a monstrous short-covering move. The NIFTY had the highest single-day gain of the decade and ended with a robust increase of 569.40 points (+5.32%).
There are several technical repercussions of the abnormally larger-than-usual move in the markets. First, it has protected the crucial 10650-10780 support zone, and it has survived the bearish outcome that would have come after a downside breach following a rounding top formation. Secondly, there are chances that such a massive move can push the markets into a period of consolidation once again even if some follow-up downside occurs over the coming days. It will be absolutely natural that the markets may take some breather, before moving significantly higher from the current levels.
We expect a slightly volatile start to the trade, and the intraday trajectory that is formed in the first hour of the session will be crucial to watch. It will be essential to see if the markets take some breather and if some profit-taking follows or it continues its move up, which will now be a hysterical behavior of the markets.
Monday is likely to see the levels of 11380 and 11435 acting as immediate resistance points. Supports come in much lower at 11200 and 11130.
The Relative Strength Index (RSI) on the daily chart is 58.5647; it has marked a fresh 14-period high, which is bullish. The PPO has turned positive again, and the daily MACD has shown a positive crossover.
The NIFTY had cooled off 100-odd points before it closed on Friday. Some follow-up moves in the early part of the day may not be ruled out, but any vertical movement in a hysterical manner will put the risk-reward ratio unfavorably skewed. The NIFTY has closed outside the upper Bollinger band. However, given the unusually large size of the candle, a temporary pullback inside the band cannot be ruled out. We recommend chasing the moves very cautiously and remain vigilant at higher levels.
Milan Vaishnav, CMT, MSTA, Consulting Technical Analyst Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)