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  • Milan Vaishnav, CMT, MSTA

Trade Setup For Monday: Visible Signs Of Exhaustion Seen; Avoid Aggressive Buys At Current Levels


A visible Bearish Divergence on RSI

The markets continued to edge higher and at the same time, also continued to display signs of a possible and long overdue exhaustion of up move while it ended the day with modest gains. The session remained somewhat different as the markets opened on a higher note, pared its gains but rose to end higher. Such behavior of the session kept the markets range bound and further threw few signs which point towards possible exhaustion of the current up move. In the end, the NIFTY ended with net gains of 53.90 points (+0.47%).


A quiet start to the week is expected. However, we cannot ignore the distinct bearish divergence that is shown by RSI on the daily charts. The Friday’s rise has also come with some shedding of the Open Interest in the NIFTY futures. This may not point directly towards anything immediate, but we cannot ignore such behavior if it recurs as it may point towards likely distribution happening at higher levels.


Monday is likely to see the levels of 10650 and 10710 acting as immediate resistance points. Supports come in lower at 11570 and 11450.


The Relative Strength Index (RSI) on the daily chart is 71.7689. RSI not only remains in overbought range, but it also shows a bearish divergence against the price. Such bearish divergence occurs when the NIFTY forms a fresh 14-period high, but RSI does not. The daily MACD stays bullish but it is seen narrowing its trajectory.


A Doji Star occurred on Candles. This candle also has a longer than usually lower shadow. Both of such formations occurring when the markets are overbought and showing a bearish divergence against lead indicator can invite bearish consequences going ahead. This signals a potential reversal though it requires a confirmation on the next bar.

Speaking on a broader term, markets are distinctly showing signs of exhaustion. Though such condition may persist for some time and we may see markets forming marginal highs, the persistent bearish divergence with a lead indicator cannot be ignored. There is no doubt that a gush of liquidity is chasing the markets, and this might show some momentum persisting, but the present structure of the chart shows enough warning signs that a corrective move is now imminent on the markets. We strongly recommend staying away from making aggressive purchases and continue keeping exposures at modest levels.


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