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  • Milan Vaishnav, CMT, MSTA

Wednesday Trade Setup: Incremental Upside Likely With Limited Extent; Watching These Levels Crucial

After seven days of relentless bear-grip, the Indian equity markets saw a technical rebound on the anticipated lines. In yesterday’s note, we had mentioned the possibility of a short-covering led technical pullback, which happened on Tuesday. The markets opened higher but failed to capitalize on the strong opening that the index got. After paring the opening gains entirely by early afternoon, the second half of the session saw the markets rebounding again. The headline index moved higher by over 150-points from the intraday low point and ended the day with net gains of 170.55 points (+1.53%).

The markets were deeply oversold on the short-term time frame, and a technical pullback, primarily fueled by short-covering, was imminent and expected. It is important to note that NIFTY is within the expected range in which it is likely to consolidate. The process of confirmation of a temporary bottom will require NIFTY to move past the crucial levels and also fill the gap that it has created a couple of days back. The volatility index, INDIA VIX, cooled off by 2.62% to 24.5425.

Wednesday is likely to see the levels of 11350 and 11405 acting as resistance points. The supports will come in at 11180 and 11125 levels.

The Relative Strength Index (RSI) on the daily chart is 31.78; it stays neutral and does not show any divergence against the price. The RSI has just crossed above 30 from the oversold area, and this is a bullish sign. The daily MACD remains bearish and trades below its signal line.

A Bullish Harami emerged on the candle. Such formation occurs when the prior candle engulfs the current candle, which has a white body. This can be seen as a mild attempt to find a bottom and some exhaustion of the selling pressure. In any case, candles should never be traded in isolation.

The pattern analysis shows that the NIFTY has held the double bottom support, which existed near the previous session’s low. However, with the kind of global risk-off that we are presently dealing with, violation of a few technical levels is normal.

If we do not have any overnight weakness to deal with, the markets may see some follow up short-covering in the initial trade on Wednesday. It is imperative to note that the NIFTY is still not entirely out of the woods, and it has all the possibilities of facing a selling pressure again at higher levels. It would be prudent not to get carried away in a short-covering led moves and resort to aggressive buying. Given the present technical setup, even if the markets see some more upside, it will stay limited in extent unless a bottom is confirmed.

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