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  • Milan Vaishnav, CMT, MSTA

Trade Setup For Friday: Some Consolidation Likely As Short Covering Led Rally May Take A Breather

The weekly options expiry played itself as expected but did so on a much stronger note. The markets saw a robust short covering that led the rally and ended the day with substantial gains. The NIFTY saw a negative and weaker than expected start to the day. However, after trading briefly in the red, the index crawled back into the positive territory. The major part of the session was spent with the rising upward trajectory. The NIFTY ended near the high point of the day, posting gains of 140.30 points (+1.20%).

The firm up move that happened was due to sharp short covering as this has coupled with shedding of Net OI by NIFTY. The markets are near the vital pattern resistance of 11850-11870 range once again. The NIFTY may face stiff resistance around these levels and to get carried away with this short-covering led rally does not make sense as yet. Some consolidation around current levels may happen in a capped range.

Friday may see some follow-through positive moves in the initial trade. The levels of 11870 and 11900 are next resistance points for the markets. Supports come in lower at 11750 and 11680.

The RSI on the daily chart is 53.0207; it remains neutral and does not show any divergence against the price. The RSI, when visually inspected, seem trapped around a couple of its pattern resistance points. The daily MACD remains bearish and trades below its signal line.

An engulfing bullish candle has happened. Though it translates into a potential bullish consequence, the present place of its occurrence makes it relatively less stronger or significant. However, it cannot be ignored as it has emerged near the 50-DMA level, which is presently at 10686.

The pattern analysis shows that the NIFTY has held on to its 50-DMA support level at the close. The 50-DMA level, therefore, continues to remain an immediate support level for the markets.

Given the fact that the present rally was solidly founded on robust short covering, we may not see any significant follow-through up move happening. The markets may trade on a positive note but may not yet show any runway rise. We recommend utilizing all future up moves in protecting profits and taking some money off the table. There are chances that we may see the markets consolidating with the level of 10680 acting as essential support for the NIFTY. With a range bound trade expected, positions on either side should be kept modest and aggressive bets should be avoided. A highly selective outlook is recommended for the day.

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