On the last day of the trading week, the Indian stocks witnessed a massive short-covering led move that propelled the markets higher and end the day with strong gains. The markets opened on a positive note. Following a positive start, the NIFTY saw paring of its gains in the morning session. However, after that blip in the morning, the Index reversed its trajectory again. It stayed in the upward rising trajectory and kept getting incrementally stronger. It not only went above past the psychologically important 18000 levels, but managed to stay above that point as well. While the markets successfully maintained their gains, the headline index ended with strong gains of 229.15 points (+1.28%).
It is important to note that the surge that was seen on Friday was fueled solely by heavy short covering from lower levels. Short covering was evident as the NIFTY November month futures shed over 6.80 lakh shares or 6.32% in net Open Interest. It would be extremely crucial to see if this short-covering gets replaced with fresh buying; it is only built up of fresh longs that would propel the markets higher. The NIFTY still has to nullify the potentially dangerous Head & Shoulder formation; NIFTY will invalidate this formation only if it moves past 18150 convincingly. With just four trading days in the coming week, NIFTY’s price behavior vis-à-vis the levels of 18150 will be important to watch.
Volatility dropped; INDIAVIX came off by 6.94% to 15.2175. Monday is likely to see the levels of 18150 and 18190 acting as resistance points. The supports come in at 18020 and 17940 levels.
The Relative Strength Index (RSI) on the daily chart is 55.60; it is neutral and does not show any divergence against the price. The daily MACD is bearish and below its signal line. However, the Histogram suggests that that downward momentum is diminishing and the NIFTY is trying hard to put and validate supports in the present zone.
The pattern analysis shows that the Head and Shoulder formation is still there; this is definitely potentially a bearish one. However, as mentioned in our previous technical note, any formation should not be read in isolation; the neckline of this formation coincides with the important support of 50-DMA which stands presently at 17795. Unless this is taken out, no preemptive shorts should be taken. Also, this pattern will be nullified if the NIFTY moves past the 18150 levels convincingly and stays above that point.
In the present technical setup, we recommend avoiding any excessively leveraged exposures until the present potentially bearish formation is nullified and canceled. It is recommended to also avoid short positions so long as the NIFTY is above the 50-DMA. By the time a clear directional bias is established, it would be prodent to continue staying highly stock-specific while approaching the markets.
This was first published by The Economic Times.
Milan Vaishnav, CMT, MSTA
Consulting Technical Analyst
Member: (CMT Association, USA | CSTA, Canada | STA, UK) | (Research Analyst, SEBI Reg. No. INH000003341)
