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Tuesday Trade Setup: NIFTY At A Record High Again; Be Prepared For This Thing While Sticking To These Sectors

In the yesterday’s technical note, the level of 15200 was mentioned as a crucial level to watch for NIFTY. It was expected that if the Index is able to move past this level, it can pile up some incremental gains. Monday’s session saw the NIFTY opening with a modest gap up and saw itself opening above this level. The most part of the day was spent by the markets maintaining these gains. It got stronger as the day progressed, and the headline index finally ended with a net gain of 151.40 points (+1.00%). The banking and financial stocks dominated the uptrend. This was reflecting in the NIFTY as all of its top gainers were from the banking and financial services universe.

NIFTY now stands at a precarious level. This is reflected in the options data. The 25FEB expiry has seen maximum Call and Put writing and OI addition at 15300 levels. This means that apart from short-term immediate jerks, market participants are treating this level as an inflection point. For the current week, 15200 and 15500 continues to hold maximum Put and Call OI respectively. We will see NIFTY oscillating in these levels going ahead from here with much increased amount of volatility. Another matter of concern is the entire financial group, be it most of the private banks, PSUs, or a few financial services stocks, are moving higher with continued bearish divergence on their lead indicators.

We will not have any overnight cues to deal with on Tuesday as US Markets will be shut on observance of President’s Day. Tuesday may see the level of 15350 and 15465 acting as resistance, while supports will come in at 15200 and 15050 levels.

The daily RSI is 71.45; it has not only entered the overbought zone, it also shows a strong bearish divergence against the price again. The daily MACD is bullish and trades above the signal line. A rising window occurred on the chart. This usually results in continuation of an uptrend, but this cannot be read in isolation. If we read this formation along with the other evidence present on the chart, it would badly need a confirmation on the next trading day.

The volatility declined as the INDIAVIX came off by 2.57% to 21.4750. All and all, the markets are now extremely overstretched to the extent of getting unhealthy. If the current move must sustain in a healthy way, some corrective consolidation stands imminent. Also, it is important to bear in mind that such relentless and near-vertical up move can lead to equally or even more violent corrective moves. We recommend to completely stay away from all high beta stocks now and use each up move only for protecting profits and taking money off the table.

The defensives took a back seat; this often happens when high beta stocks are being chased. We recommend continuing to limit purchases to only defensive stocks even if they show up relative underperformance in the immediate short-term to protect from any expected volatile corrective moves.

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)

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