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Tuesday Trade Setup: NIFTY Overstretched But Strong; FO Data Tells You To Adopt This Approach

The markets ended yet another session with gains as it continued to post up moves in an unabated manner following strong liquidity inflows. The NIFTY saw a modestly gap up opening; however, the morning session saw some minor intermittent profit taking bouts. The markets, in general, refused to give up and went on to pile slow but steady incremental gains in the second half of the day. It marked a day’s high in the late afternoon trade while it oscillated in a narrow 100-point range. These gains were maintained until the end of the session as the NIFTY closed with a net upside of 137.50 points (+0.96%).

The markets are now presenting a contradictory picture. On one hand, the derivative data show an immensely strong undercurrent; on the other hand, the structure of the charts stay highly overstretched. The previous session saw high Put writing at 14400 levels. On the other side, the maximum Call OI shifted to 14800 levels. The NIFTY PCR (all expiries) stays very strong at 1.80, but at the same time, it is overbought. Given the current technical setup, the markets may post some incremental highs, but volatility and profit-taking bouts will also increase along with this.

Tuesday may see a quiet start to the day. The levels of 14525 and 14630 will act as immediate resistance points. The supports come in at 14400 and 14365 levels.

The Relative Strength Index (RSI) on the daily chart is 79.73; it stays overbought and reflects a bearish divergence against the price. The daily MACD is bullish as it stays above the signal line. On candles, a rising window occurred. This occurs out of a gap on the upside and usually resolves with a continuation of the uptrend. However, this will need confirmation on the next trading session.

The volatility, as reflected by INDIAVIX, has surged by 8.44% to 22.3875. Amid the present technical setup, we recommend avoiding all high beta stocks and the stocks that have run up too hard. With the markets not giving up and with the corrections, if any, remaining short-lived and intermittent, shorts too should be avoided. All purchases should be kept highly stock specific and focused on the stocks which are defensive, low beta, and which have started to improve its relative strength following some consolidation. A highly cautious chase of momentum is advised.

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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