Markets

Trade Setup: Shrinking price band signals sharp moves and higher volatility ahead

Domestic equity markets had a rangebound session on Wednesday, with the benchmark Nifty oscillating in a limited range before ending with minor gains. Nifty saw a strong and positive start, but marked its intraday high in the early minutes of the session. After a good start, the market came off the high point and traded within a capped range until late afternoon.

The market made an attempt to test its opening highs, but profit booking in the last hour of trade dragged the index lower. Nifty oscillated in a limited range throughout the day, but never slipped into the negative territory. The headline index finally ended with a minor gain of 23.05 points ,or 0.20 per cent.

The 50-pack faced resistance precisely in the turbulent zone between 11,430 and 11,500 levels, which is the area created by the formation of a gap when the market started its primary decline. This zone will pose stiff resistance to Nifty in the near term.

The weekly index options expire on Thursday and F&O data showed maximum Call Open Interest (OI) at 11,500 level and most Put OI at 11,300. Nifty saw high Put writing at 11,400 level in the previous session. Nifty’s behaviour against this level will be important. Volatility continued to decline, with INDIA VIX coming off 2.69 per cent to 19.8800.

On Thursday, the 11,450 and 11,500 levels will act as key resistance for Nifty, while supports will come in at 11,345 and 11,200 levels.

The Relative Strength Index, or RSI, on the daily chart stood at 65.60 level. It has shown a bearish divergence against price. The RSI did not mark a new 14-period high along with Nifty.

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The daily MACD remains bearish and does not show any divergence against price. No other important formation was observed on the candles.

While staying in the Rising Channel, Nifty has flirted with the turbulent area created by the gap that occurred when the 50-pack started its decline. This area between 11,430 and 11,500 levels will be extremely crucial to watch out, as this gap needs to be filled in for any up-move to materialise.

All and all, the 11,430-11,500 zone will be a not-trade zone for Nifty. A weak dollar is helping the market to maintain its momentum. As liquidity chases the momentum, we advise investors not to aggressively short the market. At the same time, the upside momentum should be chased carefully with strict trailing stop losses. The bands are contracting and this is pointing to sharp moves and increased volatility in the coming days.

(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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