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Trade setup: Nifty showing signs of exhaustion; market breadth is key

Opening after a trading holiday, the stock market on Thursda..

Opening after a trading holiday, the stock market on Thursday saw a positive start on expected lines. Though it marked a fresh marginal high once again, it saw paring of gains after the initial trade. However, Nifty once again recovered gradually from the low point and spent rest of the session in a capped range. It ended with a gain of 11.85 points or 0.10 per cent.

Thursdays session was a classical consolidation that happens when the market is in overbought zone, but refuses to correct. In this process, we also saw some mild signs of exhaustion though it may be very temporary in nature. It came in the form of slightly cracked market breadth, as the few of the broader sectors underperformed.

As we approach Fridays session, we expect a quiet start to the trade. However, the high level of 10,620 may continue to pose resistance to Nifty in the immediate short term. The index is at risk of slipping into a range corrective movement, which can be called consolidation in a broader sense.

The levels of 11,620 and 11,655 will pose technical resistance to the Nifty on Friday. Supports have moved little lower against the current closing levels, and they exist at 11,535 and 11,480 levels.

The RSI (Relative Strength Index) on the daily chart is 71.0629. While continuing to remain mildly overbought, it also continued to show bearish divergence against the price. The daily MACD stays bearish while trading above its signal line. No significant formations was observed on the candles.

Coming back to the RSI, it was seen resisting to a pattern and this may potentially stall the upmove in the immediate short term.
Overall, the Nifty is displaying signs of mild tiredness on the charts. The intraday bands are getting narrower and the market breadth is slightly cracking.

As mentioned in the previous notes, investors may continue to chase momentum, but they will have to remain extremely vigilant at higher levels.

While keeping the overall positions very light, high degree of caution is advised for the day, as very temporary stalling of upmove may not be ruled out.

STOCKS TO WATCH: Good technical set up was observed in stocks of Piramal Enterprises, Ashok Leyland, NCC, Aurobindo Pharma, Jain Irrigation, Bata India, HCL Technologies, Bajaj Finance, United Breweries, Mindtree, Thomas Cook and HDFC Standard Life.

(Milan Vaishnav, CMT, MSTA is Consultant Technical Analyst at Gemstone Equity Research & Advisory Services, Vadodara. He can be reached at [email protected])

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