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  • Milan Vaishnav, CMT, MSTA

Trade Set-up For Wednesday: NIFTY Steeply Overbought; Avoid Mindless Chase Of Momentum

While refusing to show any corrective intent, the markets continued to stack gains once again on Tuesday while ending with gains. Markets witnessed a positive start but after trading with gains in the initial trade, the NIFTY gave up all its gains in a very short time. The index traded flat for the until afternoon trade after which it again saw itself putting on gains. Though NIFTY did not take out its previous day’s high comprehensively, it still ended the day with gains of 70 points or 0.61%.

As we approach Wednesday’s trade, it is a time when retail short term traders need to step back and refrain from making any fresh purchases. The NIFTY remains steeply overbought on the daily charts and any move in the present situation without any consolidation or a mild correction puts a big question mark on its sustainability going ahead from here.

Wednesday is likely to see the levels of 11550 and 11585 acting as immediate resistance points. Supports will come in lower at 11450 and 11365 levels.

The Relative Strength Index (RSI) on the daily chart is 79.5095. RSI has marked a fresh 14-period high, but it remains steeply overbought. The daily MACD trades above its signal line.

On the candles, a bar resembling a Hanging Man has occurred. Though this is not a classical Hanging Man formation, its occurrence following a Doji on the previous day continues to show fatigue on the charts despite continued up move.

The pattern analysis on the daily charts shows that NIFTY has achieved its price targets derived from the measuring implications following the breakout from the broad trading range. It now trades deeply overbought.

It is important to note that despite the markets posting gains, the last two days of gains has come with clear sign of fatigue at current levels. Without disputing the strong momentum that is in place, if the markets continue to move higher without showing any consolidation or even a mild corrective intent, it can make all such further up moves unhealthy. In absence of any consolidation or mild correction, the sustainability of all such future up-moves will be in question.

All in all, we strongly suggest traders to refrain from chasing momentum unless the markets in general show some corrective moves. There are high chances that a trader can get trapped at higher levels while in a mindless pursuit to up-moves. The Rupee, that has seen a sharp appreciation over couple of days is expected to show some respite and the stocks benefiting from this could show some relative out-performance in the markets. A highly cautious outlook is advised for the day.

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