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Thursday Trade Setup: NIFTY's Move With VIX Like This Is A Concern; Yields, Dollar Index To Be Watched

On a closing basis, the NIFTY extended its up move for the eighth day in a row. However, the session stayed volatile with the NIFTY swinging both ways before ending with gains. The markets opened once again on a stronger note, but after trading in a capped range in the morning, the markets witnessed a corrective move which saw all the gains getting wiped out and the index dipping in the negative. The NIFTY stayed volatile in a rage, but the afternoon trade saw a sharp pullback rally fueled by short covering from the lower levels. This took the markets near its high point. The headline index finally ended with a net gain of 118.05 points (+0.93%).

From the technical perspective, the markets are now flashing warning signs at current levels. The markets saw a sharp corrective move during the day which was much on the anticipated lines. Importantly, the strong up move in the last two sessions have come along with a surge in volatility, which is not a good sign either. On Wednesday, the INDIAVIX surged another 2.10% to 22.0325. INDIAVIX and the Index are usually inversely related. If the volatility continues to rise as it has been happening over the past two days, it is making Index vulnerable to sharp profit taking bouts from current levels.

Thursday is likely to see a volatile start to the day. The levels of 11780 and 11860 are likely to act as resistance points. The supports come in lower at 11660 and 11580 levels. Any corrective move is likely to make the trading range wider than usual.

The daily RSI is 77.35; it stays in overbought territory. It has marked a new 14-period high; it stays neutral and does not show any divergence against the price. The daily MACD is bullish and trades above the signal line. A candle with a long lower shadow occurred on the charts. If this happens during an up move, it may temporarily pause the move on the higher side. This is not a classical hanging man pattern as in case of hanging man, the shadow is expected to be thrice the size of the body.

It is also important to note that the Indian equities have run up a bit ahead of the curve. On the other hand, the US10-yr Yields are rising and the Dollar Index is also due for a technical rebound, if not a rally. In either case, it is likely to have a depreciative pressure on the Indian Rupee and such a situation usually does not go down well with equities. We recommend continuing to approach the markets cautiously while sticking to defensive bets.

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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