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Outlook For Wednesday: NIFTY At Sharp Overbought Levels; These Factors Hint At Caution

The Indian equities continued to pile up gains for the seventh day in a row as it went on to end one more day with decent gains. The opening for the session was a modest one this time. However, the NIFTY stayed in the upper rising trajectory throughout the day. Except for a minor profit bout that the NIFTY witnessed in the afternoon, the trend remained intact. The index did not slip into negative even once for the entire day. It soon recovered after a minor paring of gains, posted a fresh high and ended with a net gain of 170.05 points (+1.36%).

From a technical perspective, the NIFTY is in such a shape that it has made the risk-reward ratio absolutely unfavorable for any fresh chase of momentum. The NIFTY PCR is above 1.85; this is an extreme overbought area for the markets by any standards. The markets are at one of the highly risk-prone zones and this was reflected in the volatility that spiked 7.28% to 21.5775. The NIFTY has also completed its classical target after breaking out from the broad trading zone above 12000 levels. Any more unabated up sides will stay prone to equally sharp profit taking bouts.

Wednesday is likely to see the levels of 12730 and 12790 as resistance points; supports come much lower at 12560 and 12480 levels.

The RSI on the daily chart is 75.52; it has marked fresh 14-period high. It is neutral and does not show any divergence against the price. The daily MACD is bullish; it trades above the signal line. 

The pattern analysis on the daily charts shows that the NIFTY has fully achieved the price targets that can be calculated using the classical methods in technical analysis. This also means that any unabated up move is now making the trade setup highly risky.

All in all, the NIFTY is in extremely overbought territory; it would be very unwise and imprudent to chase the up move in its current form. We recommend to now stay away from making fresh purchases. Shorts may be taken cautiously as the NIFTY is yet to show any sign of stoppage or the rally. However, that being said, purchases, if any, should be kept limited only to defensives even if they tend to underperform in the present setup as the markets, in general, remain vulnerable to sharp corrective bouts.

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

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