Markets

Trade setup: Nifty behaviour against 200DMA key; but MACD is bearish

In a strong move that the market saw on Friday, Nifty made a fierce attempt to move past the 200-DMA after having faced a hurdle in it over the past several days. The index opened on a positive note, but traded with capped gains for most part of the session. However, the second half of the session saw the market gather more strength and Nifty test the all-important 200-DMA. The headline index managed to close a notch above that level with a net gain of 161.75 points, or 1.51 per cent.

Monday’s opening and Nifty’s behaviour against the 200-DMA, which now stands at 10,869 level, will be extremely crucial to watch. For Nifty to attempt an extension of the current move, it will have to keep its head above this crucial level. From a weekly perspective, Nifty has close near the 50-week moving average. So, the market’s behaviour this week against these two crucial levels will decide the trend over the immediate short term. Volatility continued to decline, as INDIA VIX came off 4.75 per cent to 24.1575.

Nifty is likely to see a steady start to Monday’s session. The 10,930 and 10,985 levels will act as key resistance, while supports will come in at 10,835 and 10,750 levels. The Relative Strength Index or RSI on the daily chart stood at 67.19. it has shown a clear bearish divergence against price. While Nifty marked a 14-period high, the RSI did not do so. The daily MACD remains bearish and trades below its signal line. Apart from a white body candle that emerged on the charts, no other formations were noticed.

Pattern analysis showed Nifty remains in the upward rising channel which it has created after the Rising Wedge resolved in a continuation formation. In the process, Nifty has managed to move past all its key moving averages.

In order to continue moving higher, Nifty will have to move out of the filter at the 200-DMA level. If this happens, we will see renewed strength in the market.

Milan 19July2020

However, given the relentless up-move in the market, the stage is set for some consolidation. The market moves are getting unhealthy at higher levels and that is a good signal that a mild corrective move, or consolidation is imminent.

But even if some consolidation occurs, it would be healthy for the market in the long run, as the risk-reward ratio remains highly skewed at the moment. A cautious approach to the market is advised for the day.

(Milan Vaishnav, CMT, MSTA, is a Consulting Technical Analyst and founder of Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at milan.vaishnav@equityresearch.asia)

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